Health Insurance deduction could be disallowed due to Tax Traps!

What Most CPAs prepare incorrectly and how it can cost you money!
By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm jeff@jbrookswa.com 602-687-9900 x101

Errors: shareholder and partner health insurance and heath savings account payments are paid through the business when these payments should be paid and deducted personally resulting in less chance of error and a sure fire tax deduction!! One way around the problem is to make sure that the health insurance premium payments are changed to salary or guaranteed payments (for a partner) but then payroll taxes and additional accounting entries are required. Paying the health insurance premiums personally avoids the payroll taxes and simplifies the amount of accounting work. Heath savings account rules are another problem that if audited by the IRS will result in additional tax, interest and penalty.

Another error is where the S Corporation shareholder or partner taxable income is less than the health insurance premiums for the shareholder or partner. For example if the shareholder or partners share of the taxable income is $4,000 for the year but the health insurance is $14,000 for the year, only $4,000 of the premiums are tax deductible!!

Here is an example of an letter sent to fictitious client:

1. An HSA in an S corp is treated the same as a 125 plan so the owners and highly compensated cannot have HEATH SAVINGS ACCOUNT employer contributions like the other employees.
2. A number do and yes, all employer’s contribution to each eligible employee needs to be the same. For example, if you had an employer contribution for Joe and other employees of $50 per month, you cannot have the corporation pay say $250 per month for another employee, Mary.
3. You can have two classes: A. employee and B. employee plus dependents. So you could give A employees $50 per month and B employees $100 per month.
4. Normally, I have my S corporation shareholders cut personal checks for their personal contribution to the H.S.A. as well as for the premiums. Why because it is simpler with less hassle and the bottom line is the S Corporation shareholder still gets the deduction!
5. The S corporation shareholders then take full above line deductions on page 1 of their personal returns for both the H.S.A. and the health insurance premiums. For example if $3,150 is the maximum for the H.S.A. $3,150 then you would pay $3,150 personally and get a tax deduction for $3,150 on your personal tax returns.
6. If you do not pay the health insurance premiums personally, then by 12-31, your actual health insurance premium needs to be added to you W-2 by crediting health insurance premiums and debiting Officer’s salary. Your W-2 would be higher by the health insurance premium.
7. How do you do this if ABC Corporation is paying your premium? Call you’re your payroll service and talk to the person or email them. If health insurance premium paid by the corporation is $5000 per year, then you would tell your payroll service to show on a separate check: gross of $5,100 less Medicare $73.95 less health insurance premiums paid by corporation..Say $5,000 results in a net of $26.05. As you can see this is a lot of work and journal entries.
8. A better way is to pay your premiums personally and we will be able to take the deduction on the first page of your tax returns without all of this hassle!! The key is if you did pay personally, we would need to know that amount so we make sure to take the deduction on your personal tax returns.
9. If your premiums still are paid through your S corporation, I would reimburse the S corporation for these premiums.
10. By paying the check personally, you still get the tax deduction and you are safe from the IRS! If you have the corporation pay the premium and you fail to follow step 7 and add the premiums to gross payroll/W-2, IRS will disallow the deduction. Ouch!!

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com