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Rev. date: 09/20/2012

The "Affordable Care Act" of 2010 Offers New Tax Deductions and Credits

Tax Topic 763
On March 23, 2010, the President signed into law the Patient Protection and Affordable Care Act (PPACA) which was later amended by the Health Care and Education Reconciliation Act (HCERA) on March 30, 2010. The PPACA, as amended by the HCERA, is referred to as the Affordable Care Act (ACA) and enacts significant changes to America’s health care system. Business tax deductions and credits for employers were created by the passage of this legislation. Some tax provisions took effect in 2010, and more will be implemented during the next several years. The information under the following headings briefly explain some of the key income tax provisions of the legislation that is now in effect.

The Small Business Health Care Tax Credit

This new credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees, and specifically targets those businesses with low and moderate income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. For the 2010 tax year the credit generally is available to small employers who pay at least half the cost of single coverage for their employees. For additional information on this topic, refer to the Small Business Health Care Tax Credit for Small Employers page on the website.

Health Coverage for Older Children

The expense of health coverage for an employee's children who do not turn 27 years of age at any time during the taxable year is now generally a pre-tax (tax-free) benefit to the employee. This expanded health care benefit applies to various work place and retiree health plans. These changes have allowed employers with cafeteria plans (plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits) to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self employed health insurance deduction on their federal income tax return.

Medicare Part D Coverage Gap "donut hole" Rebate

The Affordable Care Act provided a one-time $250 rebate in 2010 to assist Medicare Part D recipients who have reached their Medicare drug plan's coverage gap. The IRS did not make this payment, and it was not taxable to its recipients. More information on the rebate can be found at

Qualifying Therapeutic Discovery Project Credit and Grant Program

This program was designed to provide tax credits and grants to small firms that show significant potential to produce new and cost-saving therapies, support U.S. jobs and increase U.S. competitiveness. Applicants were required to have their research projects certified as eligible for the credit or grant. IRS guidance describes the application process.
Submission of certification applications began June 18, 2010, and applications had to be postmarked no later than July 21, 2010, to be considered for the program. Applications that were postmarked by July 21, 2010, were reviewed by both the Department of Health and Human Services (HHS) and the IRS. All applicants were notified by letter dated October 29, 2010, advising whether or not the application for certification was approved. For those applications that were approved, the letter also provided the amount of the grant to be awarded or the tax credit the applicant was eligible to take.
The IRS published the names of the applicants whose projects were approved as required by law. Listings of results are available by state.
For more information on these business credits and benefits click the following links: Affordable Care Act Tax Provisions and Affordable Care Act of 2010.

Additional Information

This legislation will affect many different federal agencies. The Department of Health and Human Services has established the following website,, to assist with questions concerning this important legislation.