Introduction
When it comes to running an S Corporation, there are several tax advantages that business owners can take advantage of. One such advantage is the ability to deduct health insurance premiums as a business expense. However, there is a common mistake that many S Corporation owners make when it comes to this deduction. In this article, we will dive deeper into this topic and explore how to avoid this S Corporation health insurance deduction mistake.
The Mistake: Personal Health Insurance Premiums
One of the most common mistakes that S Corporation owners make is deducting personal health insurance premiums as a business expense. While it may seem logical to do so, the IRS has specific rules regarding this deduction. According to the IRS, health insurance premiums can only be deducted as a business expense if they are paid by the S Corporation on behalf of its employees.
Qualified Employees
To properly take advantage of the health insurance deduction, it is important to understand who qualifies as an employee. According to the IRS, a shareholder who owns more than 2% of the S Corporation’s stock is not considered an employee for this purpose. Therefore, if you are a shareholder who owns more than 2% of the stock, you cannot deduct your personal health insurance premiums as a business expense.
Alternative Options
While shareholders who own more than 2% of the stock cannot deduct their personal health insurance premiums as a business expense, there are alternative options available. One option is to include the health insurance premiums in the shareholder’s wages. By doing so, the premiums become taxable income to the shareholder, but they can be deducted as a personal medical expense on their individual tax return.
Another option is for the S Corporation to establish a health reimbursement arrangement (HRA). An HRA allows the S Corporation to reimburse employees for their individual health insurance premiums on a tax-free basis. This can be a beneficial option for shareholders who own more than 2% of the stock and want to receive some tax advantages for their health insurance expenses.
Proper Documentation
To ensure that you are correctly deducting health insurance premiums as a business expense, it is crucial to maintain proper documentation. This includes keeping records of the premiums paid by the S Corporation, as well as any reimbursements made through an HRA. Additionally, it is important to have a formal plan in place for the HRA, outlining the terms and conditions for reimbursement.
Conclusion
In conclusion, when it comes to deducting health insurance premiums as a business expense for an S Corporation, it is important to avoid the common mistake of deducting personal health insurance premiums. Shareholders who own more than 2% of the stock are not eligible for this deduction. However, there are alternative options available, such as including the premiums in the shareholder’s wages or establishing a health reimbursement arrangement. Proper documentation and understanding of the IRS rules are key to avoiding this S Corporation health insurance deduction mistake.
References
– IRS: Publication 535: Business Expenses – https://www.irs.gov/publications/p535
– IRS: Health Reimbursement Arrangements – https://www.irs.gov/pub/irs-drop/n-02-45.pdf
