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Health Care Tax Break for Small Businesses: How It Works

More employees should be covered now

HEALTH health care reform

— Alex Telfer/Gallery Stock

En español  | Craig Larsen, who owns a financial planning firm in St. Charles, Ill., is eyeing a once unheard of incentive for a new employee: health insurance.

Under the new health care reform law small business owners are now eligible to receive a tax credit for providing health care coverage, which is retroactive to the beginning of the year.

“I’m looking forward to taking the credit,” says Larsen. “It’s not a huge amount, but it will help.”

While employees of big companies expect to have health care coverage as a fringe benefit, it’s a rarity for those working in small shops and businesses. And yet, companies with fewer than 100 workers employ about 43 million Americans. So the new tax incentive is potentially good news for people currently working in those businesses who have no health insurance. Moreover, although it’s too early to tell, the credits also could give a huge boost to those running or starting new businesses. Assuming that premiums don’t skyrocket, it may be easier to attract and retain employees.

Tax break available now

The tax break is one of the first health care reform provisions to go live. It is designed to encourage small employers to offer insurance for the first time or maintain coverage they already have.

The amount of the tax credit an employer could receive works on a sliding scale. The maximum credit goes to smaller employers—those with 10 or fewer full-time equivalent employees—paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more full-time employees, or that pay average wages of $50,000 per year or more.

What are the rules?

As with any IRS regulation, there are a bevy of catches. The credit applies to businesses that have picked up the tab for at least half of the premiums for their employees this year. It doesn’t apply to businesses that simply make insurance available but don’t pay anything toward the premiums.

For tax years 2010 through 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers. Tax-exempt organizations only qualify for a 25 percent credit.

Because the eligibility rules are based in part on the number of full-time employees—not the total number of employees—businesses that use part-time help may qualify even if they employ more than 25 individuals.

Claim the credit on 2010 income taxes

Eligible small businesses can claim the credit starting with the 2010 income tax return they file in 2011. For tax-exempt organizations, the IRS will provide further information on how to claim the credit. The ever-diligent agency has already mailed postcards to some four million businesses simply alerting them about the break.

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