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Little Known Tax Credit for Small Nonprofits Tucked in Health Reform Law

LarsonAllen, LLP

CPAs, Consultants & Advisors

Little Known Tax Credit for Small Nonprofits Tucked in Health Reform Law

There’s a health reform tax credit that could immediately help small nonprofits offering health insurance coverage to employees. A lot of organizations haven’t noticed this opportunity for savings because it’s lost amidst the “Affordable Care Act.”

Specifically, Congress is providing a 25 percent credit based on the amount of health insurance premiums paid in 2010. The credit will be offered until 2014, when state-run exchanges will be in operation.

“The rules about how to claim the credit are incredibly complicated,” says Larry Adams, a nonprofit and government principal with LarsonAllen. “The IRS has released a draft of the claim form which requires eight separate computations.”  

The credit is subject to certain limitations, and is targeted to organizations that primarily employ moderate and lower-income workers. It can be claimed by completing Form 8941, Credit for Small Employer Health Insurance Premiums, which is still in draft form and for which instructions have yet to be released.

The basic qualifying requirements and limitations
To qualify for the credit, an eligible small employer (ESE) has to meet all of the following requirements:

  • A qualified health plan

  • Twenty-five or fewer full-time equivalent (FTE) employees for the tax year. (This number is determined by dividing the total hours worked by all employees during the year by 2,080.)

  • Average annual wages not exceeding $50,000 for the tax year. (Calculate the average annual wages by dividing the total wages by the number of FTE employees. Then round that number down to the nearest $1,000.)

  • Contributions of at least 50 percent of the insurance premiums for all eligible employees. (For the 2010 transition year, differing percentages can be made as long as all employer payments are at least 50 percent of each employee’s premium—based on single coverage.)

There are limitations to claiming the credit, including:

  • The credit amount gradually phases out if the number of FTE employees exceeds 10, or if the average annual wages exceed $25,000. Employers with exactly 25 FTE employees or average annual wages exactly equal to $50,000 are not eligible for the credit.

  • In certain circumstances, an organization that uses part-time or seasonal help can qualify for the credit even if the entity employs more than 25 individuals.

  • There are separate state-by-state ceilings on the premiums paid and an overall cap based on the payroll taxes paid by the organization (specifically, federal withholding and Medicare).

  • Only non-elective premiums qualify for the credit.

How to file a claim

The exact filing details aren’t clear since the IRS has yet to publish the instructions for Form 8941. They are expected to be released later this year. However, this much is already known:

  • Form 8941 will need to be attached to Form 990-T, Exempt Organization Business Income Tax Return, which is normally filed when a nonprofit has unrelated business income. If you pay unrelated business income tax, it is likely that this credit will reduce the tax due. If no tax is due, the credit is refundable.

  • Even if you do not have unrelated business income (e.g. advertising income), you will need to file the 990-T in order to claim the health care credit.

Even if you don’t have unrelated business income, you need to file the 990-T in order to claim the credit.

“By utilizing the 990-T as a vehicle for claiming the credit, the IRS appears to be reinforcing the need for small nonprofit employers to annually report all unrelated business income in excess of $1,000,” notes Adams.

What you should do now
Since the tax credit is refundable, tax planning prior to year end will help you understand if you qualify, and if you can increase the credit amount for 2010.

  • List employees by name, title, hours worked, annual salary, and premiums paid for health insurance in 2010.

  • Calculate your organization’s estimated eligible credit.

  • Determine if any tax planning before year-end will allow your organization to increase the amount it may claim.

  • Have your calculations reviewed by a qualified professional.

How we can help
Exempt organizations could receive a significant refund by filing the 990-T for 2010. However, since the return is subject to an audit by the IRS, it is especially critical that the credit calculations are correct and supported by the facts. LarsonAllen has developed a credit calculator to help nonprofits determine if it qualifies and estimate how much the credit may be.


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