Tax Credits vs. Deductions: Why Credits Matter
Tax credits reduce your tax liability dollar‑for‑dollar, making them more powerful than deductions, which only lower taxable income. One credit that small businesses often overlook is the health care coverage credit for employers who provide health insurance to their staff.
Eligibility for the Health Care Coverage Credit
Under the Affordable Care Act (ACA), certain small employers that offer health insurance may qualify. Even though the credit has been around for more than a decade and can only be claimed for two consecutive years, newer businesses or those that recently started offering coverage may still benefit.
How Much Is the Credit Worth?
- Maximum credit: 50% of group health coverage premiums paid by the employer.
- Requirement: Employer must contribute at least 50% of the total premium or a benchmark premium.
- For 2025: Full credit applies to businesses with 10 or fewer full‑time equivalent (FTE) employees and average annual wages of $33,300 or less.
- Partial credits: Available on a sliding scale for businesses with fewer than 25 FTEs and average wages under $66,600.
- Adjusted for inflation: In 2026, thresholds rise to $34,100 and $68,200.
Timing Rules for Claiming the Credit
The credit can only be claimed for two consecutive years. Credits claimed before 2014 don’t count.
- If you began offering coverage in 2025, you may claim the credit on your 2025 and 2026 returns.
- If you start in 2026, you may claim it on your 2026 and 2027 returns.
Other Considerations
Premiums not eligible for the credit can generally be deducted as ordinary business expenses. Additional rules apply, so it’s important to review eligibility carefully.
Can Your Business Claim the Credit?
If you’re unsure whether your business qualifies for the full or partial credit, consult a tax advisor. They can help determine eligibility and explore other credits you may be able to claim on your 2025 or 2026 returns.