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03 - Accounting & Taxes Accounting Help & Tax Strategies

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  #1  
Old 03-12-2008, 01:13 PM
csr01
 
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Default Health Insurance for > 2% owners of S-corp

I have included the health insurance benefits for > 2% shareholder employees of the s-corp as wages on their W2's. I have indicated health insurance in box 14 of W2. Question: I have been told that the health insurance should show on the K-1. Is this only if it was not included in the W2's?
Anybody have clue on this one? thanks
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  #2  
Old 03-12-2008, 03:43 PM
OldJack
 
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I expect that who told you was thinking of a partnership k-1 rather than a S-corp shareholder k1. It goes on the W2 as income and the shareholder is therefore allowed the deduction as a self-employed person on his 1040, page 1, line 29.
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  #3  
Old 03-12-2008, 05:10 PM
csr01
 
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Thanks Old Jack I appreciate the feedback. I will no longer worry about it.
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  #4  
Old 03-17-2008, 02:36 AM
johnnym
 
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OldJack - I am under the impression that the company needs to reimburse the owner/employee and then take the health insurance as a deduction at the company level. Of course the company could also pay directly or setup their own plan.

In my research on the matter I did not believe that the owner/employee was allowed to take a deduction on their personal return, which is why the need to be reimbursed or have the benefit paid directly is there.
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  #5  
Old 03-17-2008, 07:57 AM
OldJack
 
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Johnnym, we have 2 separate health insurance situations at issues in this post.

First, my answer above was for an insurance policy in the name of the S-corp that covered and benefited a >2% shareholder. The S-corp deducts the health insurance expense as wages and adds the cost to the shareholder's W2 gross with the amount only subject to federal income tax withholding and not employment taxes (FICA & Medicare). The W2 indicates that the difference in Gross Wages and Employment Tax wages is due to health insurance and the shareholder therefore has a deduction on page 1 of his 1040 as self-employment health insurance. This is all in accordance with the IRS Revenue Ruling 91-26 (you can google that if you like).

Second, there is an entirely different issue of the S-corp reimbursing the shareholder for a health insurance where the insurance policy is owned and in the name of the individual shareholder. The S-corp certainly has an expense for the reimbursement but the IRS has taken a position on its website that health insurance purchased by the individual shareholder is deductible only as a 1040 Sch-A itemized deduction subject to the 7.5% floor limitation. This leaves a possible result that the S-corp adds the reimbursement as gross wages on the W2 but the individual shareholder can't deduct the insurance on page 1 of the 1040, rather he must deduct it on Sch-A and may not get a deduction due to the medical 7.5% limitation. I might add that the IRS position is unofficial as it is based only on their opinion (CCA 200524001) and not by any tax code or other authority.

edit: I might add that the Chief Counsel Advice (CCA 200524001) said that a self-employed person (not S-corp) could not deduct on page 1 of the 1040 unless the insurance policy was in the name of the business and not just the name of the individual. I believe that has already been overturned/reversed but I don't recall the reference cite to quote here.
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  #6  
Old 03-17-2008, 07:16 PM
johnnym
 
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Thanks OJ that helps me see what was going on.

Doesn't the recent Revenue Ruling issued by the IRS say that reimbursed personal policy premium payments (say that 5 times fast) could be deducted by the company, whereas before the company had to either pay directly or have the policy in their own name to make it a deductible expense? This was supposedly a big win for S-Corp owners.
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  #7  
Old 03-17-2008, 08:12 PM
OldJack
 
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Yes johnnym, I have not read those recently but I believe you are basically correct. The problem with such IRS writings is they seldom give a clear picture of exactly what they mean when they say deduct. The S-corp has always been allowed a deduction. Health insurance is an S-corp expense regardless if it is deducted as reimbursed insurance expense or as wages expense (the correct way is as wages). The IRS calls it a taxable fringe benefit as a >2% shareholder is deemed to not be an employee for this purpose (see pub 15b as in benefits). Their purpose is to put the 1040 shareholder on the same tax treatment as a partner in a partnership. Taxable fringe benefits are added to the W2 gross and subject to federal income tax withholding but not subject to employment taxes.

The big win is at the shareholder 1040 tax return. The S-corp has always been allowed the deduction if paid direct or reimbursed, but after the CCA opinion the reimbursed shareholder did not get a deduction on his 1040 unless he itemized the premiums as medical expense on Sch-A which is limited to the excess of 7.5% of AGI. Of course there was the question could the S-corp properly reimburse the shareholder and deduct the expense if the policy was not truly a S-corp expense with the name of the S-corp on the policy. It is my understanding that the S-corp's name on the policy is no longer required by IRS for the S-corp to reimburse the shareholder and deduct the expense as wages. However, since a reimbursement is under an accountable plan and not a group third party insurance company plan, the accountable plan must be in writing and not discriminate. A direct pay third party insurance company plan can discriminate among employees.
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  #8  
Old 07-05-2008, 08:55 PM
zacros2020
 
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Just to reopen a question that has been asked a thousand times...

I also have an S-corp with three 33% owners. For the past couple of years, we have treated premiums paid by the company sponsored health plan (high deductible HSA style plan) as a disbursement. My entire family is on the plan. However, my partners do not include their families on the plan. This results in an approximately $600 cash disbursement that I have make to the other owners every month to cover the difference between my premium and theirs. Since this has been treated as a disbursement, it does not show on the books and is not being shown as a deduction. This significantly affects our P&Ls since we show a larger profit than our cash in the bank actually indicates (we are a small but growing company with 8 employees including the three owners). It also impacts our overhead rates which we have to calculate every year for some of our public clients.

I have asked my accountant if we can simply raise our salaries to cover the cost of the premium, then pay the premium through a payroll deduction. This would allow the premiums to show on the P&L and would improve (increase) our overhead rate. From what I am reading in this thread, I should be able to track it this way, correct? I would like to move away from treating the health insurance as a distribution, if possible, so that my P&Ls and overhead rates more accurately reflect what we are spending.

Thanks.
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  #9  
Old 07-06-2008, 11:57 AM
Evan
 
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Rhetorical question: Who is the 1% owner remaining?

If the insurance policy is for the company, you should be treating the cost as an expense and W2 income to each of you. Insurance is a legitimate deduction for the business, I don't know why you wouldn't be claiming it.
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  #10  
Old 07-07-2008, 05:34 AM
zacros2020
 
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I have had two different accountants since I started the company tell me to treat the health insurance payments for the owners as disbursement. I did not research it until recently when we performed an overhead audit to determine our overhead rate for a DOT cost plus fixed fee contract (we are a small ecological consulting company - not engineers). When going through the overhead audit, and reviewing how this decision affects the P&L (honestly, it makes us look more profitable) and the balance sheet (definitely skews the net income and retained earnings portion of the balance sheet), I began to research the issue a little more. In some ways, it seems silly to negatively affect the profitability of the company this way, but I need to get my overhead rate up as high as possible for these government contracts (the private markets are dead). As for taxes, it is a wash since the disbursement passes through to my 1040 via the k1 and is then deducted as a health insurance payment. I need to discuss this with my accountant a little more.

Thanks for your input.
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