Draft Form 8941 Health Insurance Credit for Small Businesses

The IRS on September 7 issued a draft form for businesses to use in figuring and claiming the new small business health insurance credit, starting this year. Draft Form 8941, Credit for Small Employer Health Insurance Premiums, leads taxpayers through the steps of determining the number of full-time equivalent employees, average annual wages and eligible premiums paid, and then determining the amount of the credit.

Small businesses claiming the credit will include it as part of the general business credit on their tax returns. Tax-exempt small employers, who do not normally file income tax returns, will attach Form 8941 to their Form 990-T, Exempt Organization Business Income Tax Return, which will be revised for the 2011 filing season to enable eligible tax-exempt organizations to claim the credit.

The small business health care credit was created by the Patient Protection and Affordable Care Act, P.L. 111-148. In 2011, small businesses—defined as businesses with 25 or fewer employees and average annual wages of less than $50,000—are eligible for a credit of up to 35% of nonelective contributions the business makes on behalf of its employees for insurance premiums (new Sec. 45R). Tax-exempt organizations would get a 25% credit against payroll taxes.

After 2013, the maximum credit will increase to 50% of the employer’s eligible premium expense (35% for tax-exempt employers), and it will be available for a maximum of two consecutive years, beginning with the first year the employer offers a qualified plan through a state insurance exchange (Sec. 45R(e)(2)).

Employers with 10 or fewer employees and average wages of less than $25,000 will get 100% of the credit; for other eligible employers, the credit will be reduced based on the number of employees over 10 and the excess of the employees’ average wages over $25,000. The $25,000 average annual wages figure will be indexed for inflation after 2013.