It seems like this happens all too often. Congress makes confusing tax laws and leaves it up the IRS to figure out how to administrate it. Here’s one that just plain doesn’t make any sense. More than 2% owner of Sub-S Health Insurance rules. What follows may cause your brain to freeze up, for that I apologize in advance.
What are the differences? If you own a C corporation, you can pay your owner medical insurance premiums from the business, get a deduction against business income. SIMPLE. If you own a partnership, you pay your medical insurance premiums from the business they are not deducted against business income, instead, they are passed through to the owner’s personal return as a separate item on a schedule K-1, where it then goes onto the owner’s personal return as a deduction. SIMPLE. But, if you own a Sub-S business, you face a literal minefield of special actions you have to follow, or you could end up on the receiving end of a $100 a day penalty from the IRS.
Here is the simple way to understand this. The Sub-S business pays your health insurance premiums, reports it as an increase to the owner’s gross wages on your W-2 (but not subject to Social Security or Medicare tax). You then report the health insurance premiums as a deduction on the face of your form 1040 as “self-employed health insurance.” Did you follow that? The business gets to deduct the health insurance by making the owner’s salary go up by that amount. Then the owner reports higher income from their W-2, then deducts if back off as “self-employed health insurance.” OUT-IN-OUT. Net result is a deduction.
The big question is … WHY? Why did the IRS come up with this convoluted process instead of treating it the same as a partnership, or even better, as a regular C corporation?
If anybody out there has an answer to the above questions, please give me a call. In my over 40 years in this business, I have never seen an intelligent reason for this given. As best my little pea brain can come up with, is the IRS is using this to “force” Sub-S owners to take a salary.
But wait, it gets worse. If you (the owner of a Sub-S) have a spouse who is employed outside of your business, and your spouse if eligible to get family health insurance as a tax-advantaged fringe benefit, you (the owner of a Sub-S) lose your eligibility for getting a deduction for self-employed health insurance.
Also, your deduction for health insurance premiums cannot exceed the amount of your salary from the Sub-S business. Once again, the IRS expects owners of a Sub-S to take a “reasonable salary” for their activities performed in the Sub-S.
There you have it. If you survived reading this to the end, congratulations!
Have you heard? 1 Cor 13:12a says, “For now we see in a mirror, dimly, but then face to face.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com. Also on Facebook.