Tax Exempts Can Benefit from Health Insurance Credit

A part of the recently enacted health care legislation is the new Small Business Health Insurance Tax Credit for eligible small employers (ESEs) that provide non-elective health insurance to their employees.  A qualified small business is one that has 25 or fewer equivalent full-time employees with average annual full-time wages of $50,000 or less.   Generally, the credit will be at its maximum for employers with 10 equivalent full-time employees making average full-time wages of $25,000.  The credit phases out as the number of equivalent full-time employees increases above 10 and as the average full-time wages increases above $25,000.

The term “equivalent full-time employees” factors in part-time employees as well as regular full-time employees (based on 2,080 hours a year for full-time).
 
Normally, the credit is a general business credit, can be carried back for one year and carried forward for 20 years, and can offset alternative minimum tax.  However, for eligible non-profit employers who have no tax liability, the credit is used to reduce payroll taxes.

Thus, any organization described in section 501(c) which is exempt under section 501(a) that otherwise qualifies for the small business tax credit is eligible to receive the credit.  However, for tax-exempt organizations, the applicable percentage for the credit during the first phase of the credit (any taxable year beginning in 2010, 2011, 2012, or 2013) is limited to 25 percent, and the applicable percentage for the credit during the second phase (taxable years beginning in years after 2013) is limited to 35 percent.  

This small business tax credit is otherwise calculated in the same manner for tax-exempt organizations that are qualified small employers as it is for all other qualified small employers.  

Tax-exempt organizations are eligible to apply the tax credit against the organization’s liability as an employer for payroll taxes for the taxable year to the extent of: (1) the amount of income tax withheld from its employees under section 3401(a); (2) the amount of hospital insurance tax withheld from its employees under section 3101(b); (3) and the amount of the hospital tax imposed on the organization under section 3111(b).  However, the organization is not eligible for a credit in excess of the amount of these payroll taxes.

If you have questions about how your tax-exempt organization can benefit from this new credit, please give this office a call.

---