S Corporation Shareholders: Deducting Self-Employed Medical Insurance
May 29, 2013
By Dan Gibson, CPA
In this era of ever-increasing medical insurance premiums, S corporation shareholders should be mindful of the limitations with respect to these expenditures. By ignoring these limitations, shareholders risk the deductibility and the deduction for this expense could be denied.
A 2% employee-shareholder may be eligible for an above-the-line deduction under IRC Sec. 162(l) for the cost of accident and health insurance premiums paid by the corporation (Rev. Rul. 91-26). The deduction is equal to 100% of the amount paid for medical insurance for the shareholder, his spouse, and dependents and is reported as an adjustment to income on the shareholder's Form 1040.
This deduction has two limitations imposed by IRC Sec. 162(l)(2):
- The deduction is not available for calendar months in which the 2% shareholder or spouse is eligible to participate in another employer-subsidized health insurance plan.
- The deduction cannot exceed the taxpayer's earned income [as defined in IRC Sec. 401(c)(2)] derived from the trade or business that provides the health insurance plan. S corporation shareholders treat their social security wages from the S corporation as earned income for purposes of this limitation [IRC Sec. 162(l)(5)].
A taxpayer is a 100% shareholder in an S corporation where he receives taxable wages of $64,000. Box 1 of his W-2 includes $4,000 of health insurance premiums that were paid for him and his family by the S corporation. He also received a Schedule K-1 from the S corporation reporting a $75,000 loss that was passed through to him. Can the taxpayer claim an above-the-line deduction of $4,000 on his Form 1040 for the health insurance premiums?
Answer: Yes, the taxpayer can claim a $4,000 deduction for the health insurance premiums paid by the S corporation. His pass-through loss of $75,000 will have no effect on his deduction. The deduction is based solely on his W-2 wages from the
S corporation. IRC Sec. 162(l)(5)(A).