The Small Business Health Care Credit passed earlier this year offers an attractive tax incentive to small business owners. However, the credit can be difficult to decipher and several limitations may apply. To assist us in our conversations with business owners we have created an easy to follow worksheet that determines whether a business is eligible for the full credit, a partial credit or no credit at all.
As with all tax legislation there are several exceptions to the general rule. If any of the following apply to your business you will need to dig a little deeper and should seek the counsel of your CPA.
- Don't make payments directly to the insurer.
- Pay less than 50% of the cost of the premium.
- Have so called "Cadillac" insurance plans with higher premiums.
- Pay different percentages of health care premium cost for different employees.
- Have seasonal workers.
One significant draw back to the new law is that business owners and family members on the payroll are not eligible. If recorded properly the owner and family members can still get a 100% business deduction for premiums paid, but they won't receive a tax credit.
Something else to remember is that at 35% the credit has roughly the same tax effect as a health insurance deduction for corporations and business owners in the highest tax bracket. For a business owner in a 25% tax bracket the credit is more favorable than the deduction, but since the employee benefit deduction must be reduced by the credit amount the benefit is only incremental
For instance a credit based on $30,000 of premiums paid would be worth $10,500 to the business owner. If the owner is in a 25% tax bracket the business deduction alone provided a $7,500 tax benefit. Don't get me wrong. Three thousand dollars is still a good chunk of money but law makers have been making this credit sound like the great answer to small business owners' problems. It provides a little relief, but once the owner and family members are excluded that relief is even less than it should be.
Download the worksheet here.