Determine Eligibility for the Health-Care Tax Credit

When President Barack Obama signed the health-care overhaul law in March, certain small businesses became eligible for a 35 percent tax credit to offset the cost of providing health insurance to their employees. These employers now have until Sept. 15 to apply for the credit on their 2010 corporate tax returns. Small businesses organized as sole proprietorships, and other entities that pass through their business income to individual tax returns, have until Oct. 17 to file under extension deadlines. (Individuals and companies affected by Hurricane Irene will get additional time to file; specific information is available on this page of the Internal Revenue Service website.)

Companies and sole proprietorships that filed their returns last spring and have since determined they are eligible for the tax credits can amend their 2010 tax returns to claim them. Corporations use Form 1120X and individual sole proprietors use Form 1040X to amend their returns.

Although the credit provides a generous incentive to the smallest U.S. companies, it’s unclear how many will claim it in this first year. “It’s too early to determine the participation rate … since many have yet to file their 2010 taxes,” says Sandra Salstrom, a spokeswoman for the U.S. Treasury Dept. A recent study by the U.S. Small Business Administration’s Office of Advocacy estimates that 4 million businesses are eligible for the 2010 credit and 65 percent of those (about 2.6 million companies) could use it to offset 2010 tax liability. (If a company has no tax liability for 2010, under the Small Business Jobs Act of 2010 it can carry back the credit five years to offset previous liability.)

Small businesses that qualify in 2010 but can’t use the credit now also have the option to carry it forward. The credit will be available through tax year 2013 at a maximum of 35 percent and in 2014 at up to 50 percent for up to two tax years.

Credits Remain in Effect

Federal officials are pushing to get the word out about the credit. “Now more than ever, Treasury and the IRS want to make sure that small business owners don’t leave money on the table,” Salstrom says. But a series of lawsuits challenging the constitutionality of the health-care reform bill in federal courts around the country could hamper federal officials’ efforts. The legal challenges, which have met with mixed results at the federal appeals level and are expected to wind up in the U.S. Supreme Court, may confuse business owners about whether the credits are still in effect.

No matter what becomes of the court challenges, Salstrom says, the credits are available now and will continue to be available. “People do get confused about what is currently on the books when they hear news about court cases and other news more broadly,” says Eric Smith, an IRS spokesman. “Sometimes we see them make mistakes because they think something was not in effect or vice versa.”

The ultimate goal of the tax credit is to encourage more small employers to offer insurance to their employees. The SBA’s Office of Advocacy study shows in 2009, only about 33 percent of companies with fewer than 10 employees offered health insurance. For businesses with predominantly low-wage workers, access to employer-sponsored insurance is even lower, down to nearly 18 percent for companies with fewer than 10 employees. This contrasts to much higher rates of health insurance access—from 95 percent to 99 percent—at companies with 100 to 999 employees, according to the research summary.

The tax credit was designed to appeal to these kinds of employers, and encourage them to pick up at least half the cost of their employees’ health insurance coverage. The full 35 percent credit goes to companies with the equivalent of 10 or fewer workers paid, on average, less than $25,000 annually. The credit phases out with larger payrolls up to 25 full-time employees (or part-time equivalents) and average wages of $50,000 annually. Seasonal workers and the company’s owners and close relatives are not counted as employees for eligibility purposes and their health insurance expenses cannot be offset by the tax credit.

Exact details on which companies qualify for the tax credit and how they can go about claiming it are available at this page on the IRS website.