Small Business Tax Implications of Health Care Reform For 2010

On March 23, 2010 President Obama signed into law one of the largest and most controversial pieces of legislation ever conceived in the history of the United States called the Patient Affordable Care Act (PACA). This new legislation is so complex that it will take nearly eight years to fully implement. The first stage of PACA takes effect in 2010 with four distinct provisions. This article will address one of those provisions, The Small Business Tax Credit.

The Small Business Tax Credit:
Beginning January 1, 2010, small businesses who contribute 50% or more toward health insurance premiums for their employees are eligible for a small business income tax credit. This provision creates two classes of employers:
1. Eligible small employers and
2. Large employers.

Eligible small employers are defined as employers with 25 or fewer full-time employees with average annual wages of $50,000 or less. Everyone else exceeding these thresholds is, by default, a large employer and not eligible for the credit.

Full-Time Employees:
A full-time employee is one who works 2,080 hours per year. To determine the number of eligible full-time employees, an employer must divide total hours worked by all employees (numerator) by 2,080 (denominator). Total hours worked by employees cannot include hours worked by employee that exceed 2,080 hours for the year. Thus, overtime is excluded from the calculation of total hours.

Calculation of the Non-Refundable Income Tax Credit:
A maximum non-refundable income tax credit of 35% will be available only to employers with 10 or fewer full-time employees and average annual wages of $25,000 or less.

These are the two baselines for the credit:

* 10 full-time employees and

* $25,000 in average annual wages.

As the number of full-time employees rise above 10 and/or the average annual wage rises above $25,000, the credit quickly disappears. This is known as a phase-out and because of the complexity of the formula to determine an employer's eligible credit, a table was created to make it easier to compute the eligible credit. For example, if an employer has 11 full-time employees with an average annual wage base of $15,000, the credit is 33%. For each additional full-time employee above 10, the credit is reduced by 2%. If an employer has 10 full-time employees with an average annual base exceeding $25,000, but not exceeding $30,000, the credit is 28%. The credit is reduced by 7% for as annual average wages exceed the $25,000, $30,000, $35,000, $40,000 and $45,000 annual wage table category. If you use the tables, the credit is 0% once the total number of full-time employees exceed 24 or once the average annual wage exceeds $45,000.

Other Rules:

* Aggregation rules apply, which means affiliated companies must be aggregated in determining

eligibility, the number of full-time employees and average annual wages.

* The credit may be applied against regular income tax and alternative minimum tax.

* If an eligible small business employer qualifies for the credit but cannot use the credit in the current

year, they may carry the credit back one year to use against the prior year's income tax.

There is also a credit for non-profit organizations of 25%. This credit, unlike the 35% business credit, may be used to reduce the Medicare portion of payroll taxes (Form 941 will have a line item for this credit).