Allevity Blog

Small Business Tax Credit

Aug 15, 2018

Ahhhh, tax season. It’s everyone’s favorite time of year, right? 

OK, let’s be real – most people don’t love tax season. And small business owners are often among those dreading this time of year the most. After all, filing as a business requires a substantial attention to detail – and small businesses don’t always have people on staff that are up to the task. It can be stressful compiling all the necessary information, and the fear of coming out the other end owing money is always lingering. 

But this tax year, at least, small businesses have something to look forward to. The Small Business Tax credit has changed – mostly in your favor!

What is the Small Business Tax Credit? 

This is a credit that was essentially established to help small businesses offset the costs of providing insurance options for their employees. Between 2010 and 2013, the credit available was worth up to 35 percent of premiums paid for small business employers. Charities and other small tax-exempt employers were eligible for a credit of up to 25 percent of premiums paid. 

What has Changed? 

Starting in the 2014 tax year, here’s what’s different: 

  • The maximum credit for small business employers is now 50 percent. 
  • The maximum credit for small tax-exempt employers is now 35 percent. 
  • To qualify, employee health plans must be purchased through a Small Business Health Options Program (SHOP) Marketplace, or qualify for an exception to this requirement.
  • The credit itself is available to eligible employers for two consecutive years. 

How Will These Changes Affect Your business? 

The obvious benefit is that your business will now likely qualify for a higher credit than you have in previous years. That’s good news for everyone!

For the 2014 tax year, participating in the direct enrollment process counts as SHOP Marketplace participation. But again, that is only for 2014 – in all subsequent years, health plans must be purchased directly through SHOP in order to qualify.

Who is Eligible?

So now, the big question. Do you qualify? This is what the IRS is looking for when determining eligibility for this tax credit:

  • Your business must have fewer than 25 full-time employees.
  • You must pay an average wage of less than $50,000 a year.
  • You must pay at least half of your employee’s health insurance premiums.
  • You also must purchase insurance through the SHOP Marketplace (or qualify for an exception). 

What Else Do You Need to Know? 

The beauty of this tax credit is that it can be carried over, which means that even if you don’t owe during the current tax year – you can apply the credit to future years, or even back to previous years. And since your health insurance premium payments will still be more than the credit itself, some small businesses can also claim a business exempt deduction for premiums paid in excess of the credit. 

For tax-exempt employers, the credit is actually refundable as well. Which means that even if they owe nothing in taxes for the current tax year, they may still be able to receive the credit as a refund. 

The other question a lot of small businesses will have is how the size of the credit is determined. This is based on a sliding scale, with bigger credits going to smaller businesses and charities. 

Claiming the Credit

In order to calculate the credit due to your small business, you will need to use Form 8941, Credit for Small Employer Health Insurance Premiums. Small businesses should include this amount as part of the general business credit on their income tax return. 

If you have any other questions about how to claim the credit you should contact your CPA or tax professional.

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