Small Business Tax Implications of Health Care Reform For 2010

On March 23, 2010 President Obama signed into lawshare of health insurance premiums and this dollar
one of the largest and most controversial pieces ofamount is the credit that is applied against business
legislation called the Patient Affordable Care Act (akaincome tax (or passed through to partners or S
Health Care Reform Bill). This new legislation is soCorporation shareholders). The amount of the credit
complex that it will take nearly eight years to fullyutilized to reduce income tax reduces the employer's
implement. The first stage takes effect in 2010 withhealth insurance deduction for the year.
four distinct provisions. This article will address one ofThese are the two baselines for the credit:
those provisions, The Small Business Tax Credit.10 full-time employees and
Beginning January 1, 2010, small businesses who$25,000 in average annual wages.
contribute 50% or more toward their employeesAs the number of FTEs rise above 10 and/or the
healthinsurance premiums for are eligible for aaverage annual wage base rises above $25,000, the
non-refundable small business income tax credit. Thiscredit quickly disappears. This is known as a phase-out,
provision creates two classes of employers:and because of the complexity of the formula to
1. Eligible small employers anddetermine an employer's eligible credit, a table was
2. Large employers.created to make it easier to compute the eligible credit.
Eligible small employers are defined as employers withFor example, if an employer has 11 FTEs with an
25 or fewer full-time employees with average annualaverage annual wage base of $15,000, the credit is
wages of $50,000 or less. Everyone else exceeding33%. For each additional FTE above 10, the credit is
these thresholds is, by default, a large employer andreduced by 2%. If an employer has 10 FTEs with an
not eligible for the credit.average annual base exceeding $25,000, but not
Full-Time Employees:exceeding $30,000, the credit is 28%. The credit is
To determine the number of eligible full-time employeesreduced by 7% as the average annual wage base
(FTE), an employer must divide total hours worked byexceeds the $25,000, $30,000, $35,000, $40,000 and
all employees by 2,080. Total hours worked by$45,000 average annual wage base table amount. If
employees cannot include hours worked by anyyou use the tables, the credit is 0% once the total
employee that exceeds 2,080 hours for the year.number of full-time employees exceed 24.9 or once
Thus, overtime is excluded from the calculation of totalthe average annual wage exceeds $45,999.
hours. 5% owners and 2% S Corporation shareholdersOther Rules:
are not considered employees for purposes of the1. Aggregation rules apply, which means affiliated
full-time employee calculation.companies must be aggregated in determining eligibility,
Average Annual Wages:the number of full-time employees and average annual
To determine the average annual wage base, anwage base.
employer must divide total wages paid to employees2. The credit may be applied against regular income
during the year by the total number of full-timetax and alternative minimum tax.
employees (from previous calculation). 5% owners and3. If an eligible small business employer qualifies for the
2% S Corporation shareholders are not consideredcredit but cannot use the credit in the current year,
employees for purposes of the average annual wagethey may carry the credit back one year to use
base calculation.against the prior year's income tax.
Calculation of the Non-Refundable Income Tax Credit:There is also a credit for non-profit organizations of
A maximum non-refundable income tax credit of 35%25%. This credit, unlike the 35% business credit, may
will be available only to employers with 10 or fewerbe used to reduce the Medicare portion of payroll
full-time employees and average annual wages oftaxes (Form 941 will have a line item for this credit).
$25,000 or less. This credit is applied to the employer's