Small businesses may be eligible for a special tax credit for providing health insurance under the Affordable Care Act (ACA), often referred to as Obamacare. Under new regulations issued by the Internal Revenue Service (IRS), qualifying small businesses can earn a maximum tax credit of 50 percent to offset health insurance costs beginning in 2014. The limit was previously 35 percent for small businesses, which are defined as those with fewer than 25 employees with average annual wages of less than $50,000 per employee. From 2010 through 2013, the credit can reach 35 percent of the non-elective medical insurance contributions made on behalf of employees, with 25 percent for tax-exempt organizations. Also effective January 1, 2014, the maximum tax credit for tax-exempt groups will be 35 percent.
To qualify for a credit, an employer must pay premiums for each employee enrolled in health insurance coverage in an amount equal to a uniform percentage, not less than 50 percent, of the premium cost. If an employer is entitled to a state tax credit or a premium subsidy, this amount is not included in determining whether the employer has passed the test, but it is taken into account in calculating the credit.
Previously, there was no time limit on taking the credit. Beginning in 2014, however, a two-year limit applies after the first year the employer files Form 8941, Credit for Small Employer Health Insurance Premiums. Employers claiming the credit prior to 2014 can still take the credit for two more years in 2014 and later. If an entity’s predecessor entity claimed the credit in the past, the predecessor’s period will count toward the two-year period for the successor.
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