Seeing as the Tax Cuts and Jobs Act (TCJA) reduced or eliminated some tax breaks for businesses, many employers may be looking for ways to maximize any available tax credits. Small businesses can still reduce their tax liability by utilizing two tax credits in particular: a credit for providing healthcare coverage, and a credit for establishing a retirement plan. Tax credits reduce tax liability dollar-for-dollar, potentially making them more valuable than deductions, which reduce only the amount of income subject to tax. We’ll explore the eligibility requirements and potential benefits of these two tax credits below.
1. Credit for paying healthcare coverage premiums
The Affordable Care Act (ACA) offers a credit to certain small employers that provide employees with health coverage. Despite numerous attempts by Congress to repeal the ACA in 2017, nearly all of its provisions remain intact, including this potentially valuable tax credit.
The maximum credit is 50 percent of group health coverage premiums paid by the employer, if it contributes at least 50 percent of the total premium or of a benchmark premium. For 2017, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of $26,200 or less per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $53,000.
This credit can be claimed for only two years, which must be consecutive. (Credits claimed before 2014 don’t qualify, however.) If you meet the eligibility requirements but have been waiting for a potentially more advantageous year to claim this credit, 2017 might be a good time to do so. Why? The credit could still potentially be eliminated in the future if Congress again tries to repeal or replace the ACA. You can also amend returns from prior years to take advantage of this credit, though refund limitations may apply.
At this point in time, any future ACA repeal or replacement wouldn’t likely go into effect until 2019 (or possibly later). So if you claim the credit for 2017, you may also claim it on your 2018 return (again, provided that you meet the eligibility requirements). That way, you’d be getting the most out of the credit while it’s available.
2. Credit for starting a retirement plan
Small employers (generally those with 100 or fewer employees) that establish a retirement plan for employees may be eligible for a $500 credit per year for three years. The credit is limited to 50 percent of qualified start-up costs.
Of course, you generally can deduct contributions you make to your employees’ accounts under the plan. And your employees benefit from having tax-advantaged retirement savings.
If you didn’t set up an employee retirement plan in 2017, you still might have time. Simplified Employee Pensions (SEPs) can be set up as late as the due date of your tax return, including extensions. If you’d like to create a different type of plan, consider undertaking this for 2018 so you can potentially take advantage of the retirement plan credit (and other tax benefits) when you file your 2018 return.
Contact us if you have questions about eligibility
Keep in mind that additional rules and limits apply to these two tax credits. We’d be happy to help you determine whether you’re eligible for these or other credits on your 2017 return, and we could also assist you in planning for possible credits you’d like to claim on your 2018 return. Please reach out to us if you have any additional questions on tax credits or how TCJA changes could impact your business.