New Tax Credits 
Beginning in 2010 the Patient Protection and Affordable Care Act (PPACA) provides a tax credit for an eligible small employer (ESE) of up to 35% for nonelective contributions to purchase health insurance for its employees.
An ESE generally is an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax 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 an average annual full-time equivalent wage from the employer of less than $25,000.
What kind of credit is it?
The credit is a general business credit that can be carried back for one year and carried forward for 20 years. In addition to reducing income tax, the credit also reduces tax liability under the alternative minimum tax.
When is the credit available?
The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit during these tax years is health insurance coverage purchased from an insurance company licensed under state law.
Beginning in 2013 the credit is only available to ESEs that purchase health insurance through a State exchange and is only available for a maximum coverage period of two consecutive tax years beginning with the first year in which the employer offers one or more qualified plans to its employees.
Are self-employed individuals eligible?
Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S Corporation, and 5% owners of the employer are not treated as employees for the purposes of the credit. Although there is a special rule preventing sole proprietorships from receiving the credit for the owner and certain family members, spouses of self-employed owners who are bona fide employees of the business presumably are eligible employees for credit purposes.
How does the credit affect the employer's deduction for employer-paid contributions?
The credit reduces the employer's deduction under code section 162 for contributions.
How is the credit amount calculated?
Generally, 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 ESE made on behalf of the employees during the tax year for the qualifying health coverage and (2) the amount of contributions that the employer would have made during the tax year if each employee had enrolled in coverage with a small business benchmark premium.
The credit percentage that can be claimed varies with the number of employees and average wages. Calculating the credit for employers in the "phase-out" range (when the number of FTEs exceed 10, or if annual average wages exceed $25,000) can be a challenging task.
To help simplify this calculation, the Congressional Research Service (CRS) has published tables which provide an estimate of what credit percentages may apply based on . The table below applies to the years 2010-2013 for for-profit employers.
Table 1. Small Business Tax Credit as a percent of employer contributions to Premiums, For-Profit Firms in 2010-2013 (maximum of 35%)
Up to 25,000 30,000 35,000 40,000 45,000 50,000
10 35% 28% 21% 14% 7% 0%
11 33% 26% 19% 12% 5% 0%
12 30% 23% 16% 9% 2% 0%
13 28% 21% 14% 7% 0% 0%
14 26% 19% 12% 0% 0% 0%
15 23% 16% 9% 2% 0% 0%
16 21% 14% 7% 0% 0% 0%
17 19% 12% 5% 0% 0% 0%
18 16% 9% 2% 0% 0% 0%
19 14% 7% 0% 0% 0% 0%
20 12% 5% 0% 0% 0% 0%
21 9% 2% 0% 0% 0% 0%
22 7% 0% 0% 0% 0% 0%
23 5% 0% 0% 0% 0% 0%
24 2% 0% 0% 0% 0% 0%
25 0% 0% 0% 0% 0% 0%
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