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The Tax Advantages of the Affordable Healthcare Act for Small Businesses

By Daniel Halimi – Delt Law Clerk – Cal Western Class of 2014

Small business owners have received the Affordable Care Act– AKA “Obamacare” with great confusion and reluctance.[1]These fears, however, are often misplaced. With careful consideration, small business owners may realize win-win benefitsby taking advantage of the ACA.

The ACA’s purpose is to encourage small business owners to offer health insurance coverage to their employees.[2]Although an estimated 4 million business are eligible under the ACA, only half of all businesses with three to nine workers offered employees insurance in 2012.[3]

To be eligible under the ACA, the small business must employ fewer than 25 full-time employees and pay at least half their employees’ insurance premiums.[4] Eligible employers receive a 35 percent tax credit for the 2010-2013 tax years.[5] Beginning in 2014, the tax credit increases to 50 percent for two consecutive tax years.[6]The full 50 percent tax credit is available to employers who employ no more than ten full-time employees with an average salary of $25,000.[7]The tax credit is reduced as the number of full-time employees and the average annual salary increase.[8]

Tax credits provide a great benefit to business owners. Unlike a tax deduction, which only reduces taxable income, tax credits reduce the amount of taxes owed, dollar for dollar.[9]Moreover, the tax credit may be credited to past or future tax years.[10]

For example, a businesspaying $50,000 in health care premiums for 10 employees, who earn an average annual wage of $25,000, would receive a tax credit of $25,000 in 2014. A tax deduction, however, would save $17,000 in taxable income (assuming the employer is in the $335,000 to $10M tax bracket, or 34% tax rate).[11]

Further, the difference between the health care premiums and the tax credit may also be claimed as a tax deduction.[12] Using the example above, the unaccredited $25,000 in excess of the tax credit may be claimed as a tax deduction, further benefiting the small business. As a result, the small business would receive a $25,000 tax credit and may reduce taxable income by $8,500.

Health insurance is one of the most valuable benefits an employer can offer to help attract and retain good employees.[13] The ACA allows small businesses to provide an essential benefit at a low net cost. Rather than increasing an employee’s salary, a small business may offer health insurance benefits at a lower cost to attract and retain valuable employees.

 


[1] Karen E. Klein, Determine Eligibility for the Health-Care Tax Credit, Bloomberg Business Week (Sept. 13, 2011), http://www.businessweek.com/small-business/determine-eligibility-for-the-healthcare-tax-credit-09132011.html.

[2]Key Provisions Under the Affordable Care Act for Employers with Fewer Than 25 Employees, U.S. Small Business Administration, http://www.sba.gov/content/employers-with-fewer-25-employees.

[3]Klein Supra, note 1; See also Karen E. Klein, Explaining Obamacare’s Baffling Tax Breaks for Small Business (March 22, 2013), http://www.businessweek.com/articles/2013-03-22/explaining-obamacares-baffling-tax-breaks-for-small-business.

[4]Small Business Health Care Tax Credit for Small Employers (Aug. 23, 2013), Internal Revenue Service, http://www.irs.gov/uac/Small-Business-Health-Care-Tax-Credit-for-Small-Employers.

[5]Id.

[6]Id.

[7]Id.

[8]Id.

[9]Robert Franco, Affordable Care Act (“Obamacare”) Allows Tax Credits to Eligible Small Employers (Aug. 16, 2013), Source of Title, http://www.sourceoftitle.com/blog_node.aspx?uniq=1001

[10]Internal Revenue Service Supra, note 4.

[11]Small Business Health Care Tax Credit | Frequently Asked Questions (Sept. 2013), United Health Care, http://www.uhc.com/live/uhc_com/Assets/Documents/SB_TaxCredit_FAQ.pdf.

[12]Internal Revenue Service Supra, note 4.

[13]Franco, Supra, note 9.

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