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Small Business Healthcare Tax Credit

The Patient Protection and Affordable Care Act authorized a new income tax credit to encourage small businesses employing low and moderate income workers to offer health insurance coverage (IRC Sec. 45R).

 The credit generally equals 35% of the lesser of the (1) employer’s contributions during the tax year to a health arrangement to purchase qualifying health coverage, or (2) contributions the employer would have made during the tax year if each employee had enrolled in a plan with a premium equal to the average premium for the small group market in the state where the employer is offering coverage.

The credit percentage that can be claimed varies with the number of employees and average wages and begins in 2010. An eligible small employer generally is an employer with no more than 25 full-time equivalent employees (FTE’s) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000.

 The number of an employer’s FTEs is determined by dividing the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by 2,080.

The amount of average annual wages is determined by first dividing the total wages paid by the employer to employees during the employer’s tax year by the number of the employer’s FTEs for the year. The result is then rounded down to the nearest $1,000. “Wages” means wages as defined for FICA purposes (without regard to the wage base limitation).

If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced as follows.

  • If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction having as the numerator the number of FTEs in excess of 10, and having 15 as the denominator.
  • If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction having as the numerator the amount by which average annual wages exceed $25,000, and having $25,000 as the denominator.
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