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Small Business Tax Credit Eligibility

There are two phases to the small business tax credit:

Phase 1: (2010 – 2013) Eligible employers receive a small business tax credit of up to 35% of the employer’s contribution toward health insurance premiums, calculated on a sliding scale basis tied to average wages and number of FTE employees. Small businesses with tax-exempt status meeting the requirements above may receive 25% of the employer’s contribution. This credit is refundable for tax-exempt employers. Also, the credit for tax-exempt employers is limited to the amount of the tax-exempt employer's payroll tax liability. Employers already receiving this credit must purchase insurance coverage through a SHOP beginning on January 1, 2014 to qualify for this small business tax credit for 2014 and forward.

Phase 2: (2014 and onward) Eligible employers that purchase insurance through a SHOP may receive a small business tax credit of up to 50% of the employer’s contribution toward insurance premiums. These employers may take the small business tax credit for up to two consecutive taxable years. Employers that have no tax liability for their small business and meet the above requirements may receive 35% of their contribution in the form of a refundable tax credit. The amount of credit a small business receives will depend on the number of employees and average wages.

This tax credit is only for the coverage of common-law employees. When determining FTE employees for purposes of this credit, exclude sole proprietors, partners, S corporation shareholders owning more than 2% of the S corporations, owners of other business entities owning more than 5% of the business and their family members.

Additional guidance and FAQs will be available on www.irs.gov (keyword: ACA).

Next Topic: Employer Application and Enrollment

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