Code Section 45R
| Code Section | Effective Date | Name of Act | Name of Provision | 10yr Revenue Estimate ($millions) |
|---|---|---|---|---|
| 45R | 12/31/2009 | Patient Protection and Affordable Care Act | Small Business Tax Credit | -40,000 |
Small Business Tax Credit
Explanation of Provision
- Small business employers eligible for the credit
- Years the credit is available
- Calculation of credit amount
- Tax exempt organizations as qualified small employers
- Special rules
1. Small business employers eligible for the credit
Under the provision, a tax credit is provided for a qualified small employer for nonelective contributions to purchase health insurance for its employees. A qualified small employer for this purpose generally is an employer with no more than 25 full-time equivalent employees (‘‘FTEs’’) employed during the employer’s taxable year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000. These wage limits are indexed to the Consumer Price Index for Urban Consumers (‘‘CPI– U’’) for years beginning in 2014.
Under the provision, an employer’s FTEs are calculated by dividing the total hours worked by all employees during the employer’s tax year by 2080. For this purpose, the maximum number of hours that are counted for any single employee is 2080 (rounded down to the nearest whole number). Wages are defined in the same manner as under section 3121(a) (as determined for purposes of FICA taxes but without regard to the dollar limit for covered wages) and the average wage is determined by dividing the total wages paid by the small employer by the number of FTEs (rounded down to the nearest $1,000).
The number of hours of service worked by, and wages paid to, a seasonal worker of an employer is not taken into account in determining the full-time equivalent employees and average annual wages of the employer unless the worker works for the employer on more than 120 days during the taxable year. For purposes of the credit the term ‘seasonal worker’ means a worker who performs labor or services on a seasonal basis as defined by the Secretary
of Labor, including workers covered by 29 CFR sec. 500.20(s)(1) and retail workers employed exclusively during holiday seasons.
The contributions must be provided under an arrangement that requires the eligible small employer to make a non-elective contribution on behalf of each employee who enrolls in certain defined qualifying health insurance offered to employees by the employer equal to a uniform percentage (not less than 50 percent) of the premium cost of the qualifying health plan.
The credit is only available to offset actual tax liability and is claimed on the employer’s tax return. The credit is not payable in advance to the taxpayer or refundable. Thus, the employer must pay the employees’ premiums during the year and claim the credit at the end of the year on its income tax return. The credit is a general business credit, and can be carried back for one year and carried forward for 20 years. The credit is available for tax liability
under the alternative minimum tax.
Back to Explanation of Provision Menu
2. Years the credit is available
Under the provision, the credit is initially available for any taxable year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage within the meaning of section 9832, which is generally health insurance coverage purchased from an insurance company licensed under State law.
For taxable years beginning in years after 2013, the credit is only available to a qualified small employer that purchases health insurance coverage for its employees through a State exchange and is only available for a maximum coverage period of two consecutive taxable years beginning with the first year in which the employer or any predecessor first offers one or more qualified plans to its employees through an exchange.742
The maximum two-year coverage period does not take into account any taxable years beginning in years before 2014. Thus a qualified small employer could potentially qualify for this credit for six taxable years, four years under the first phase and two years under the second phase.
Back to Explanation of Provision Menu
3. Calculation of credit amount
Only nonelective contributions by the employer are taken into account in calculating the credit. Therefore, any amount contributed pursuant to a salary reduction arrangement under a cafeteria plan within the meaning of section 125 is not treated as an employer contribution for purposes of this credit. The credit is equal to the lesser of the following two amounts multiplied by an applicable tax credit percentage: (1) the amount of contributions the employer made on behalf of the employees during the taxable year for the qualifying health coverage and (2) the amount of contributions that the employer would have made during the taxable year if each employee had enrolled in coverage with a small business benchmark premium. As discussed above, this tax credit is only available if this uniform percentage is at least 50 percent.
For the first phase of the credit (any taxable years beginning in 2010, 2011, 2012, or 2013), the applicable tax credit percentage is 35 percent. The benchmark premium is the average total premium cost in the small group market for employer-sponsored coverage in the employer’s State. The premium and the benchmark premium vary based on the type of coverage provided to the employee (e.g., single or family).
For taxable years beginning in years after 2013, the applicable tax credit percentage is 50 percent. The benchmark premium is the average premium cost in the small group market in the rating area in which the employee enrolls in coverage. The premium and the benchmark premium vary based on the type of coverage being provided to the employee (e.g., single or family).
The credit is reduced for an employer with between 10 and 25 FTEs. The amount of this reduction is equal to the amount of the credit (determined before any reduction) multiplied by a fraction, the numerator is the number of FTEs of the employer in excess of 10 and the denominator of which is 15. The credit is also reduced for an employer for whom the average wages per employee is between $25,000 and $50,000. The amount of this reduction is equal to the amount of the credit (determined before any reduction) multiplied by a fraction, the numerator of which is the average annual wages of the employer in excess of $25,000 and the denominator is $25,000. For an employer with both more than 10 FTEs and average annual wages in excess of $25,000, the reduction is the sum of the amount of the two reductions.
Back to Explanation of Provision Menu
4. Tax exempt organizations as qualified small employers
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. The small business tax credit is otherwise calculated in the same manner for tax-exempt organizations that are qualified small employers as the tax credit is calculated for all other qualified small employers. However, for tax-exempt organizations, instead of being a general business credit, the small business tax credit is a refundable tax credit limited to the amount of the payroll taxes of the employer during the calendar year in which the taxable year begins. For this purpose, payroll taxes of an employer means: (1) the amount of income tax required to be withheld from its employees’ wages; (2) the amount of hospital insurance tax under section 3101(b) required to be withheld from its employees’ wages; and (3) the amount of the hospital insurance tax under section 3111(b) imposed on the employer.
Back to Explanation of Provision Menu
5. Special rules
The employer is entitled to a deduction under section 162 equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if a qualified small employer pays 100 percent of the cost of its employees’ health insurance coverage and the tax credit under this provision is 50 percent of that cost, the employer is able to claim a section 162 deduction for the other 50 percent of the premium cost.
The employer is determined by applying the employer aggregations rules in section 414(b), (c), and (m). In addition, the definition of employee includes a leased employee within the meaning of section 414(n). 743
Self-employed individuals, including partners and sole proprietors, two percent share-holders of an S Corporation, and five percent owners of the employer (within the meaning of section 416(i)(1)(B)(i)) are not treated as employees for purposes of this credit. There is also a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and these individuals are not taken into account in determining the number of FTEs or average full-time equivalent wages.
The Secretary of is directed to prescribe such regulations as may be necessary to carry out the provisions of new section 45R, including regulations to prevent the avoidance of the two-year limit on the credit period for the second phase of the credit through the use of successor entities and the use of the limit on the number of employees and the amount of average wages through the use of multiple entities. The Secretary of the Treasury, in consultation with the Secretary of Labor, is directed to prescribe such regulations, rules, and guidance as may be necessary to determine the hours of service of an employee for purposes of determining FTEs, including rules for the employees who are not compensated on an hourly basis.
Back to Explanation of Provision Menu
Back to Tax Tracker Codes Menu
742- Sec. 1301 of the Patient Protection and Affordable Care Act, Pub. L. No. 111–148, provides the requirements for a qualified health plan purchased through the exchange.
-Return of Explanation of Provision
743- Section 414(b) provides that, for specified employee benefit purposes, all employees of all corporations which are members of a controlled group of corporations are treated as employed by a single employer. There is a similar rule in section 414(c) under which all employees of trades or businesses (whether or not incorporated) which are under common are treated under regulations as employed by a single employer, and, in section 414(m), under which employees of an affiliated service group (as defined in that section) are treated as employed by a single employer. Section 414(n) provides that leased employees, as defined in that section, are treated as employees of the service recipient for specified purposes. Section 414(o) authorizes the Treasury to issue regulations to prevent avoidance of the certain requirement under sections 414(m) and (n).
-Return to Explanation of Provision