IRS Hikes Small Business Tax Breaks Under Health Reform

Qualifying small businesses can earn a tax credit of up to 50 percent -- the previous limit was 35 percent - to offset health insurance costs under new regulations just issued by the Internal Revenue Service (IRS).

There's little doubt that many business owners are confused about health reform. A recent survey by the U.S. Chamber of Commerce indicated that about a quarter of employers didn't fully know their responsibilities under the Patient Protection and Affordable Care Act (ACA).

To that end, the IRS in late August issued new ACA regulations affecting smaller businesses, those with fewer than 25 employees who make an average wage of less than $50,000 a year, clarifying which employers would qualify for tax credits. One of the key changes is the increase in the amount of tax credits to offset the health insurance costs provided to workers.

From 2010 through 2013, the credit can reach 35 percent of the non-elective medical insurance contributions made on behalf of employees, with 25 percent for tax-exempt organizations like charities, according to the IRS. The recent changes, taking effect Jan. 1, 2014, raise the maximum credit to 50 percent (35 percent for tax-exempt groups).

If you are a small business owner who did not owe tax during the year, you can carry the credit back or forward to other tax years, according to the IRS guidelines. Also, since the amount of the health insurance premium payments is more than the total credit, eligible small businesses can still claim a business expense deduction for the premiums in excess of the credit -- that's both a credit and a deduction for employee premium payments.

Additionally, the new regulations allow businesses with insurance plans that don't begin on Jan. 1 to be eligible for a tax credit if they buy health insurance from the small business exchange at some point during 2014.

Here are other key points, as detailed by the IRS:

  • To be eligible, employers must cover at least 50 percent of the cost of single (not family) health care coverage for each worker.
  • The business owner must pay premiums on coverage purchased through a health insurance exchange, otherwise known as the Small Business Health Options Program (SHOP). These exchanges are online marketplaces where employers and individuals can research and buy health plans. States are expected to run their own exchanges or partner with the federal government to organize and implement them.
  • The credit will be available to eligible employers for two consecutive taxable years.
  • Some higher-income individuals, specifically owners of sole proprietorships, partners in partnerships or shareholders, do not have to be counted when calculating the average wage. This makes it much easier for lawyers and doctors and other professionals with small businesses to qualify for the credit.

The IRS, on its website, gave an example of the possible benefits: "If you pay $50,000 a year toward workers' health care premiums, and if you qualify for a 15 percent credit, you save $7,500. If you save $7,500 a year from tax year 2010 through 2013, that's a total savings of $30,000. If, in 2014, you qualify for a slightly larger credit, say 20 percent, your savings go from $7,500 a year to $10,000 a year."

Beyond the workplace -- buying your own health insurance plan under health reform

In a recent survey of 33,000 members of 136 commercial health plans countrywide, J.D. Power found that 73 percent of consumers who don't get coverage through an employer "definitely will" or "probably will" use exchanges to secure medical protection.

So, what if you're self-employed or otherwise need to buy health insurance on your own as the ACA takes effect? J.D. Power has these suggestions:

  • Shopping for a plan? What's the cost-to-benefit ratio. Generally speaking, the higher the cost, the higher the number of plan features and healthcare provider flexibility. On the other hand, lower-cost plans may have lower premiums, but they may also have limited choices when it comes to plan features and healthcare providers.
  • Explore exchanges to learn how they work and research what is offered in your states. If you need to purchase health insurance, you can turn to an online health insurance exchange, or marketplace, to buy coverage. If your state is not operating its own marketplace, you can use the one being run by the federal government. The goal is to provide one place to allow you to compare plans and costs from multiple providers. If you meet certain income criteria, you can qualify for a tax credit to subsidize the cost.
  • Take the needed time to fully know your coverage. Understanding health plans is daunting, especially when you look at detailed rules for deductibles, co-payments and other expenses. If you don't have a clear understanding of the coverage even after taking time to get up to speed on the details, and you have a choice of plans, opt for the simpler approach. For example, you may be more satisfied with fewer choices of healthcare providers in order to have coverage with less complicated costs. also has relevant information that may be useful.

The original article can be found at hikes small business tax breaks under health reform