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Small Business Health Care Tax Credit Applies to Not-for-Profits

By: Rick Shields, CPA, CFE, Director

The Patient Protection and Affordable Care Act was signed into law in 2010. Various provisions became effective in 2010 and 2011, and more will be implemented in future years. One of the provisions, the Small Business Health Care Tax Credit, allows qualifying employers to claim a refundable tax credit for qualifying health care costs paid for its employees. Not-for-profit organization (NPO) employers may qualify for the credit even if they do not pay any income taxes. Following are criteria which must be met:

  • The NPO must pay at least 50 percent of the cost of qualified health care expenses (discussed below) for some of its employees
  • The NPO must have fewer than 25 full-time equivalent employees (FTEs) (as calculated on Form 8941 – Credit for Small Employer Health Insurance Premiums)
  • Average annual salaries and wages must be less than $50,000 (as calculated on Form 8941)

For tax-exempt entities that file on a fiscal year (e.g. year ended June 30), the first year in which the credit can be taken is the year ended June 30, 2011 (tax year 2010). The credit is available through the extended due date of the return. Therefore, qualifying NPOs that have not yet filed their 2010 tax returns can take advantage of this opportunity. An NPO employer claims the credit by filing a Form 990-T, Exempt Organization Business Income Tax Return, and attaching Form 8941. The maximum credit for an NPO, through tax year 2013, is 25 percent of qualifying expenses. After 2013, the limit is increased to 35 percent of qualifying expenses. Other limits may apply. The credit is reduced for employers with more than 10 FTEs and is also reduced for average wages between $25,000 and $50,000.

Not all health-related costs are eligible for the credit. Payments by the NPO to a health insurance company on employee health insurance premiums which are at least 50 of the cost of those respective premiums are counted. Employer payments to health savings accounts, flex spending accounts, and health reimbursement arrangements are not counted. Additional discussion regarding qualifying arrangements can be found at IRS Notice 2010-82.

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