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Small Employer Health Insurance Tax Credit: Who’s Eligible? (Conclusion)

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(Photo: ©iStockphoto/Maudib)

Mark E. Battersby |

Changes in healthcare provide small-business owners chance to take advantage of tax credits

ARDMORE, Pa. — Survey after survey reveals that health insurance is among the top fringe benefits sought by employees. For many drycleaning businesses, offering health insurance is critical to attracting the type of workers needed to succeed. Fortunately, whether the business presently offers health insurance or is merely considering offering it, there is a sliver of silver lining in the form of a unique, often-overlooked tax credit for small employers.

The Internal Revenue Service (IRS) is encouraging small businesses to explore and, if qualified, claim a unique health insurance coverage tax credit. Statistics from 2011 reveal that two out of five businesses in the nation will qualify for these tax credits. This could affect 19.3 million employees and possibly provide $15.4 billion in tax credits to small businesses.

In fact, many small businesses with 25 or fewer employees are already taking advantage of this new tax credit.

MARKETPLACES, EXCHANGES, AND SHOP

One of the key features of the Affordable Care Act is the creation of Health Insurance Exchanges, or Marketplaces, for the sale of health insurance. For employers with fewer than 50 employees, private exchanges will compete with the public Small Business Health Option Program (SHOP) exchanges each state is required to have.

Small employers that want to make health insurance coverage available to their employees can choose to offer those employees coverage from the SHOP. Should a small employer decide to offer this type of coverage, it has the ability to select which plans to make available to its employees – and it is not required to offer all coverages sold through the SHOP to its employees. However, if a small employer determines that SHOP plans will be made available to its employees, then all full-time employees must be offered this coverage.

Open enrollment for SHOP coverage was scheduled to have begun Oct. 1, and coverage will become effective Jan. 1, 2014. Commencing in 2016, the SHOP will be open for employers with up to 100 full-time equivalent employees.

THE CHANGES ARE COMING 

Every drycleaning plant, business owner and manager will see a number of important changes to the tax credit for tax years beginning in 2014. As mentioned, the credit amount increases to 50% of premiums paid by eligible small employers. Cost-of-living adjustments are made to the average annual wage phaseout amounts. (The credit is phased out gradually when average annual wages exceed certain amounts.)

Another difference involves the two-year limit on taking the credit. Before 2014, there was no time limit on taking the credit, so employers that qualified could have taken it in 2010, 2011, 2012 and 2013. Beginning in 2014, there is a two-year limit, which begins with the first year the employer files Form 8941, Credit for Small Employer Health Insurance Premiums. However, employers that took the credit before 2014 can take the credit for two more years in 2014 and later.

PAPERWORK 

Not too surprisingly, employers providing healthcare benefits also face administrative reporting requirements under the ACA. In general, the drycleaning business must use the IRS’ Form 8941 to calculate the credit. Most small businesses will include the amount as part of the general business credit on their annual income tax return. Plus, as a small-business employer, the drycleaning business may be able to carry the credit back or forward.

According to the Government Accountability Office, Congress’ investigative arm, fewer small employers claimed the Small Employer Health Insurance Tax Credit in tax year 2010 than were estimated to be eligible. While 170,300 small employers claimed it, estimates of the eligible pool by government agencies and small-business advocacy groups ranged from 1.4 million to 4 million. The cost of credits claimed was $468 million.

Among the factors reportedly limiting the credit’s use is that most small employers, 83% by one estimate, do not offer health insurance. According to many experts, the credit is not large enough to give employers an incentive to offer insurance. Complex rules on FTEs and average wages also are apparently limiting use. In addition, tax preparer groups the GAO met with generally said the time needed to calculate the credit deterred claims.

As the tax filing deadline approaches for many small drycleaning and laundry businesses, owners and managers look for ways to reduce the operation’s tax bills. Although the ACA does not require that a business provide health insurance, it does offer tax credits for eligible small businesses that choose to provide insurance to their employees for the first time, or maintain the coverage they already have.

The ugly truth is that one in four small-business owners in the United States are uninsured. Thanks to the ACA, they can now afford their own health insurance. In fact, the ACA will allow 83% of currently uninsured small-business owners to become eligible for healthcare coverage. Additionally, many small-business owners who currently buy their own individual healthcare coverage in the private market may be eligible to take advantage of new cost savings as well.

Finally, for a drycleaning business eligible for the tax credit for the 2013 tax year, but that forgot to claim it on the annual tax return, there’s still time to file an amended return.

In order to fully understand all of the pros and cons of the Small Employer Health Insurance Tax Credit, seeking out professional assistance is strongly recommended.

Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult a tax attorney for advice regarding your particluar situation.

About the author

Mark E. Battersby

Freelance Writer

Mark E. Battersby is a freelance writer specializing in finance and tax topics based in Ardmore, Pa.

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