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Eligible small employers who provide health care coverage to their employees can receive a Small Business Health Care Tax Credit from the Federal government. Here’s what you need to know about who qualifies and how to take advantage of the credit.

What is the Small Business Health Care Tax Credit?

Small business owners make numerous decisions about employee benefits. For example, the type of benefits offered can entice the most desirable candidates to apply for their company’s positions. The right type of benefits can also boost employee retention. An excellent employee benefit to consider is health insurance. If that’s a perk being offered, the small business health care tax credit is a feature of the Affordable Care Act (ACA) that may be of interest. The tax credit is limited to employers with less than 25 employees, and it operates as a sliding-scale credit based on the size of the employer. The larger the employer, the smaller the tax credit. The maximum credit is 50 percent of premiums paid (35 percent for tax-exempt employers).

Qualifying small employers can take advantage of the small business health care tax credit for two consecutive tax years providing the business owes no taxes during those years. The credit can also be carried forward or back to other tax years. Any excess amount paid for health insurance premiums over the allowable credit can be claimed as a business expense.

Who qualifies for the Small Business Health Care Tax Credit?

As mentioned above, the small business health care tax credit is for small employers with fewer than 25 full-time equivalent employees (FTE). Note that the FTE concept is based on hours worked rather than the actual number of employees.

Other qualifications include that:

The employer pays less than $50,000 a year per FTE in average wages. Determining FTEs and average annual wages should be done by your qualified tax preparer, CPA, or via guidance from the Internal Revenue Service (IRS).

The employer offers a qualified health plan to employees through a Small Business Health Options Program Marketplace (SHOP).

The employer pays at least 50 percent of the employee’s premium cost. (Not family or dependent premium cost.)

What about Tax-exempt Organizations?

Tax-exempt organizations are also eligible for the small business health care tax credit. In this case, the credit is refundable to the extent that it does not exceed income tax withholdings or Medicare tax liability. Refunds to tax-exempt organizations are reduced by the current fiscal year sequestration rate. For an explanation of sequestration and how it impacts the small business health care tax credit, consult your tax advisor or accountant.

How do small businesses take advantage of the Small Business Health Care Tax Credit?

To claim the small business health care tax credit, the IRS requires Form 8941 (Credit for Small Employer Health Insurance Premiums) to be filled out and submitted. For small businesses, the amount should be included as part of the general business credit on the company’s federal tax return. The amount should be included on Form 990-T (Exempt Organization Business Income Tax Return) for tax-exempt organizations. Note: this form must be filed for a tax-exempt organization to claim the small business health care tax credit, even if the business does not typically file that form.

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Small business owners may find that offering perks like health insurance aren’t beyond their economic reach with incentives like this. As always, a trusted tax professional is the place to turn regarding this and other tax credits for small businesses.

The Consolidated Appropriations Act of 2021 brings a favorite business tax deduction back to life. The so-called “three-martini lunch” is in vogue once again; however, not everyone is happy about it. So, what does this mean for businesses? Read on to learn more about the deduction and the associated pros and cons.

What is the Three-Martini Lunch Tax Deduction?

There was a time – up until the mid-1980s – that business owners and executives could take a 100 percent tax deduction for entertaining clients, colleagues, or even themselves (as it was not unheard of for personal expenses to be grouped in with “business expenses”).

The somewhat scoffing name of the deduction – the Three-Martini Lunch – comes from these lavish “business expenses” that sometimes included leisurely lunches (complete with cocktails), rounds of golf, sporting event tickets, and even vacations. However, under tax laws at the time, as long as the activities were conducted in the name of entertaining clients, they could be deducted on a business’ federal return.

What Changed?

The Tax Reform Act of 1986 eliminated or significantly reduced many tax deductions, including putting a severe halt to businesses’ total deductions for entertaining potential or current clients. Beginning in 1987, the business meal deduction decreased from 100 to 80 percent. Further, the Act called for any part of the meal that was considered “lavish and extravagant” to be excluded from the amount used to calculate the deduction (although no accurate guidance was provided on what constituted “lavish and extravagant”).

Over the years, the deduction was further reduced, and finally, the Tax Cuts and Jobs Act (TCJA) of 2017 repealed the entertainment allowance and scaled the business meal deduction down to 50 percent. The deduction applied only to expenses encountered during actual business activities or active discussions.

Of course, there were caveats and loopholes associated with the changes; however, those loopholes no longer seem necessary as, after more than 30 years, the 100 percent deduction is restored. This increase is due to the Taxpayer Certainty and Disaster Tax Relief Act of 2020, part of the Consolidated Appropriations Act of 2021 (CAA 2021).

The Consolidated Appropriations Act of 2021

Championed by the White House and Senator Tim Scott, a Republican from South Carolina, the Act increases the deduction to 100 percent so that businesses can deduct the total cost of business meals on federal taxes. This increase in deduction occurred by way of an amendment to the Tax Reform Act of 1986 that makes an exception to the 50 percent rule until January 1, 2023.

What You Should Know

For expenses to be fully deductible, they must be paid or incurred during 2021 or 2022, and the food and beverages claimed must be provided by a restaurant. The Act does not explicitly apply this full deduction to entertainment expenses. Intended to help the flailing restaurant industry during the global pandemic, the Act leaves many business personnel with questions. For example, what constitutes a “restaurant”? (this is not clearly defined in the IRS code).

For some guidance, Section 4.01 of Part III of the IRS procedural guide for taxpayers who own or operate a restaurant or tavern deems a “restaurant” to be a place where “food and beverages are prepared to customer order for immediate on-premises or off-premises consumption. Examples are full-service restaurants, limited-service eating places, cafeterias, special food services (like food service contractors, caterers, and mobile food services), and bars, taverns, and other drinking places.”

Another question taxpayers are asking is how should non-food and beverage expenses be handled? (there is no accurate guidance on entertainment expenses).

As you consider these and other questions regarding the new deduction guidelines, also consider some of the proposed pros and cons of the ruling.

Pros and Cons of the Three-Martini Lunch

Returning to a full deduction for business meals and entertainment has been praised and criticized regarding how the change will impact businesses and the economy in general.

Some suggested benefits include:

• An increase in business will help restaurants and bars reopen in the time of the global pandemic.
• New employment for those out of work and reemployment for furloughed food service employees.
• A limited-time (two-year) action to bolster the foodservice industry during the pandemic.

Some of the criticisms of the Act are that:

• This deduction robs tax relief funds that are more important.
• It could be challenging to eliminate the deduction when the two-year limit comes.
• The benefit will extend only to the wealthy who do not need immediate tax relief.
• Only large, high-end restaurants that serve wealthy business clientele will benefit.

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These and other points of interest – as well as many questions – will likely arise as the tax year unfolds. To address these, it is always best for business owners to consult with a tax professional.