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IRS reveals latest reduction of refundable small business health care tax credit due to sequester

On its website, IRS has revealed that small tax-exempt employers claiming the refundable portion of the small business health care tax credit under Code Sec. 45R will see a 6.8% reduction in the amount of their refund payments. The reduction is a required “sequestration” spending cut under the Balanced Budget and Emergency Deficit Reduction Act of ’85, as amended.

Background. Under Code Sec. 45R, an eligible small employer (ESE) may claim, subject to a complex phaseout, a credit equal to 50% of nonelective contributions for health insurance for its employees. The credit is allowed for the credit period—the two-consecutive-tax year period beginning with the first tax year beginning for which the ESE files an income tax return with an attached Form 8941 (Credit for Small Employer Health Insurance Premiums). The credit reduces the ESE’s Code Sec. 162 deduction.

The credit percentage is 35% for an eligible small tax-exempt employer (tax-exempt ESE). For these tax-exempt ESEs, the credit is a refundable tax credit (claimed on Form 990-T, Exempt Organization Business Income Tax Return (and proxy tax under Code Sec. 6033(e)), limited to the amount of the employer’s payroll taxes (income tax and Medicare tax withheld from employees’ wages and the employer share of Medicare tax on employees’ wages) during the calendar year in which the tax year begins. (Code Sec. 45R(b); Code Sec. 45R(f) ; Reg. § 1.45R-3(e))

Background on sequestration. Under sequestration, “automatic” across-the-board spending cuts are made to deal with the government’s budget deficit. Refund payments issued to small tax-exempt employers claiming the refundable portion of the Small Business Health Care Tax Credit under Code Sec. 45R are subject to sequestration.

Latest “haircut” revealed. In the Affordable Care Act section of its online Small Business and Self Employed Tax Center (, IRS has announced that refund payments to a Code Sec. 45R applicant, that are processed on or after Oct. 1, 2015 and on or before Sept. 30, 2016, will be reduced by the fiscal year 2016 sequestration rate of 6.8%, irrespective of when the original or amended tax return was received by IRS. The sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise impacts the sequester, at which time the sequestration reduction rate is subject to change.

References: For small employer health insurance credit for tax-exempt ESEs, see FTC 2d/FIN ¶  L-15689.14; United States Tax Reporter ¶  45R4.10; TaxDesk ¶  384,326; TG ¶  15161.

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