The IRS recently released materials for those wishing to claim the small business health care tax credit for 2010. A provision of the Patient Protection and Affordable Care Act (PPACA), this tax credit is designed to encourage small groups to offer health care coverage for the first time or enable them to maintain the coverage they already have. It will likely provide assistance to about four million small businesses.

This tax credit can be significant for a qualifying small group. In 2010, the maximum credit is 35% of employer-paid premiums; for tax-exempt organizations, the maximum is 25% of employer-paid premiums. In 2014, the maximum increases to 50% of employer-paid premiums; for tax-exempt organizations, it increases to 35% of employer-paid premiums. In order to qualify for the credit, the employer must not employ more than 25 employees and the average annual compensation of those employees must not exceed $50,000.

Small Business Healthcare Tax Credit Eligibility Rules:

• Providing health care coverage. A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate
• Firm size. A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
• Average annual wage. A qualifying employer must pay average annual wages below $50,000.
• Both taxable (for profit) and tax-exempt firms qualify.

Here’s a look at how a company with 10 employees could benefit:

• Employees: 10
• Wages: $250,000 or $25,000 per worker
• Employer Health Care Costs: $70,000

2010 tax credit: $24,500 (35% credit)
2014 tax credit: $35,000 (50% credit)

Example 2: Downtown Diner – Restaurant with 40  Part-Time Employees

• Employees: 40 half-time (equivalent of 20 full-time)
• Wages: $500,000 or $25,000 per full-time equivalent worker
• Employer Health Care Costs: $240,000

2010 Tax Credit: $28,000 (35% credit with phase-out)
2014 Tax Credit: $40,000 (50% credit with phase-out)

Example 3: 1st Street Family Services – Foster Care Non-Profit with 9 Employees

• Employees: 9
• Wages: $198,000 or $22,000 per worker
• Employer Health Care Costs: $72,000

2010 Tax Credit: $18,000 (25% credit)
2014 Tax Credit: $25,200 (35% credit)

Example 4: Acme Air Conditioning, LLC- Manufacturing Company with 12 Employees

• Employees: 12
• Wages: $420,000 or $35,000 per full-time equivalent worker
• Employer Health Care Costs: $90,000

2010 Tax Credit: $14,700 (35% credit with phase-out)
2014 Tax Credit: $21,000 (50% credit with phase-out)

While there is no formal guidance yet, the IRS has provided educational resources for small businesses wishing to claim the credit this year. Click here to see the following information:

• Eligibility rules
• Amount of credit
• Three simple step to determine a small group’s eligibility
• More tax credit scenarios
• FAQs