A special adjustment to lower taxable income is permitted of business owners whose companies pay for their health insurance. How the deduction is computed and deducted depends upon the type of business. Therefore, these situations are addressed in training to become a tax preparer as well as courses for passing the enrolled agent exam.
The deduction from income is separate from itemized deductions for medical expenses. In fact, the business owner does not even have to itemize deductions. Normally, medical expense deductions are limited to only the portion exceeding 7.5 percent of adjusted gross income. The health insurance adjustment for business owners is not limited by income.
The premiums eligible for deduction from income are those paid for coverage of the business owner as well as spouse and dependents. Payment of health insurance premiums for business owners must occur for a plan established under the business. For self-employed individuals, the insurance policy may be in the owner’s personal name.
As learned in tax courses a person who is self-employed reports income on either Schedule C or Schedule C-EZ for a trade or business but uses Schedule F if self-employed in an agricultural activity. The reduction of income for self-employed health insurance costs is not included on any schedule with other business expenses. It is deducted elsewhere on the tax return.
For a partner in a partnership, the health insurance policy may be in either the partnership name or the name of the partner. A partner may pay the premiums directly or have them paid by the partnership. The premiums are not deducted with other business expenses on the partnership’s tax return. When the policy is in the partnership’s name, each partner’s respective share of health insurance costs paid by the partnership is reported on Form K-1 in Box 14 using code A.
If the policy is in a partner’s name, the partnership must reimburse the partner and report the premiums on Form K-1 as guaranteed payments. If this procedure is not followed, the policy is not considered as established under the business. Hence, no adjustment to income for the premium costs is permitted when tax preparer jobs are conducted.
A shareholder of an S corporation can deduct costs for health insurance provided by the company when also receiving wages from the corporation. Like partners, individuals who are more than 2 percent shareholders can maintain health insurance plans in their personal names or the name of the corporation. The corporations must reimburse shareholders for premiums on policies in their personal names.
Health insurance for 2 percent shareholders of S corporations is a tricky part of tax CPE. The corporations deduct the insurance premiums as a wage expense. As such, the shareholder receives credit for a business expense that is offset by wage income reported on Form W-2. The shareholder then deducts the health insurance costs on a personal tax return just like any self-employed individual.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
