If a non-profit pays no taxes, how does it receive a tax credit?

The credit for tax-exempt organizations is actually a refund on quarterly payments the nonprofit has made to the IRS for income tax withholdings or Medicare withholdings from employee wages. The tax credit can be claimed against three of the payroll taxes that non-profits regularly send into the IRS: the employer and employee share (combined total of 2.9%) of Medicare withholding, and the federal income taxes withheld by the employer on behalf of the employee. Employees will continue to get credit for their withheld income tax payments. 

Not all my employees are enrolled in the medical plan, do I count just my enrolled employees?

All employees, past and current that worked during the year should be included in the calculation.

Why are small businesses not able to qualify for the small business tax credit if they have group coverage outside the exchange?

Beginning in 2014, eligible small businesses can secure the tax credit only if they purchase coverage for their employees through Covered California for Small Business. The small business health care tax credit is a provision of the Affordable Care Act. This requirement is part of the legislation.

Published statistics indicate hundreds of thousands of California small employers being eligible for the small business health care tax credit. This is not my experience. Can you comment on this?

There are over half a million small employers in California. A recent report by the Lewin Group and published by The Small Business Majority found that:

• More than 375,000 small businesses in California (70 percent of California businesses with fewer than 25 workers) are eligible for tax credits to help with the cost of health coverage for their workers for the 2011 tax year
• More than two in five (42 percent of) small businesses that are eligible for this tax credit are eligible for the maximum tax credit when they file their 2011 taxes
• More than 2.4 million Californians are employed by a small business that is eligible for a tax credit for the 2011 tax year
• The total value of the tax credits that are available to eligible small businesses for 2011 is more than $1.8 billion, an average of $752 per worker

It’s worth bearing in mind that many of these small businesses do not currently offer health insurance to their employees. While the tax credit may not be the main reason for an employer to start offering coverage, we believe it’s a strong message for brokers to communicate to their employer prospects along with all the other reasons why employers should start offering coverage.

Lastly, these are statewide statistics. Agents with a client base in relatively affluent, higher-wage areas of the state will experience fewer employers that are eligible for the credit.

In the small business tax credit example on slide 49 of tab 1 in the training manual, why is the tax credit 12% in 2013 and 17% in 2014 for the restaurant with 40 part-time employees?

The maximum tax credit in 2013 is 35% and the maximum tax credit in 2014 is 50%. Employers with 10 or fewer full-time equivalents (FTEs) with average wages of $25,000 or less are eligible for the maximum tax credit.  The tax credit is subject to a reduction if the employer’s FTEs exceed 10 or average annual FTE wages exceed $25,000.

Will the small business health care tax credit no longer be available in 2016?

Tax credits are available for a total of two consecutive years beginning when the small business claims the tax credit. There is no expiration date for the tax credit provision itself.

What is the estimated number of businesses that qualify for the small business tax credit?

More than 375,000 small businesses in California (70.1 percent of California businesses with fewer than 25 workers) are eligible for the small business health care tax credit.

See: http://www.smallbusinessmajority.org/small-business-research/downloads/050912_CA_Small_Business_Healthcare_Tax_Credit.pdf

Will small business employers that currently provide health insurance be able to get tax credits?

Yes, if the small business meets the eligibility requirements. See http://www.irs.gov/pub/irs-utl/3_simple_steps.pdf

For tax years 2010 through 2013, there is a sliding-scale credit of up to 35% of the employer’s eligible premium expenses. For tax-exempt employers, the maximum amount of tax credit is 25% of eligible premium expenses. Beginning in 2014, the maximum amount of tax credit increases to 50% of premium expenses as long as coverage is purchased from Covered California. For tax-exempt employers, the maximum amount of tax credits increases to 35% in 2014.

Must a small business be enrolled in Covered California for Small Business for all of 2014 to qualify for tax credit? Is credit prorated if enrolled for half the year?

No, a small business need not be enrolled in Covered California for Small Business for all of 2014 to qualify for the tax credit if the following conditions are met:

(i) the employer offers coverage in 2014 that begins on a date other than the first day of its taxable year;

(ii) the employer offers coverage during the period before the first day of the plan year beginning in 2014 that would have qualified the employer for the credit; and

(iii) the employer begins offering coverage through Covered California for Small Business as of the first day of its plan year that begins in 2014.

If these conditions are met the employer will be treated as having offered coverage through Covered California for Small Business for its entire 2014 taxable year. Thus, the credit will be calculated at the 50% rate for the entire 2014 taxable year and the 2014 taxable year will be the start of the two-consecutive-taxable year credit period.

Will Covered California help determine eligibility for the federal tax credit?

Covered California has a small business tax credit calculator on their website: https://coveredcaagent.pinnacletpa.com/smallbusiness_tcc/. Claremont also has a health care tax credit solution on our website: https://www.claremontcompanies.com/tax-credit. Since this determination can be complicated, small businesses should always contact their tax professional for this determination and for other detailed tax information related to their specific situation in this regard.