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TAX BILL May 24, 2007 The House Democratic leadership confirmed May 22 that the $4.8 billion small business tax package and the accompanying minimum wage offset will be included in the final fiscal year 2007 emergency war supplemental spending measure lawmakers expect to complete by Memorial Day. I will send a fax summarizing the tax provisions contained in the bill if, and when, the President signs the legislation. S CORP OWNERS' MEDICAL INSURANCE PREMIUMS IRS ARTICLE. In 2005, the IRS National Office issued Chief Counsel Advice (CCA) 200524001. This Chief Counsel Advice held that a self-employed, sole proprietor who purchases health insurance in his or her own name may treat the health insurance as purchased in the name of the proprietorship. Therefore, the CCA concluded that the proprietor could deduct the health insurance premiums on page 1 of Form 1040 under §162(l) even though the insurance was in the proprietor's name and not in the proprietorship's name. However, on May 15, 2006, the IRS said in a article at the IRS web site (Headliner Volume 163) that if an individual is the sole owner and the sole employee of an S corporation and the health insurance is purchased in the owner/employee's name, the owner may not deduct the health insurance premiums under §162(l) as a for AGI deduction. In other words, the IRS position is that the treatment under CCA 200524001 that applies to sole proprietors does not apply to S corporation owner/employees. In the web site article, IRS concluded that S corporation owner/employees were not allowed to purchase health insurance in the shareholder's own name and still obtain the for AGI deduction under §162(l). IRS' reasoning goes something like this: Section162(l)(5) provides that §162(l) (the for AGI deduction) applies to a more than 2% S corporation owner that is treated as a partner under §1372. Section 1372(a) provides that for purposes of applying the fringe benefit rules of the Code, 1) an S corp is treated as a partnership and 2) any more than 2% owner of the S corporation is treated as a partner in the partnership. If the S corporation does not have a health plan for the owner/employee (since the S corp does not pay the premiums and the policy is in the name of the owner/employee) the health insurance plan is not a fringe benefit provided by the S corp to the owner/employee, so §1372(a) does not apply to treat the S corp owner as a partner for purposes of the health insurance premium deduction under §162(l). AICPA PROPOSED REVENUE RULING. On December 29, 2006, the AICPA Executive Committee sent a letter to Mr. Harry Beker, Branch Chief-Health and Welfare at the IRS National Office. Along with the letter and at the request of the IRS, the AICPA sent a proposed revenue ruling dealing with the issue raised by the Headliner article on May 15, 2006. Caution! This is a proposed revenue ruling which, at this time, has not been accepted or rejected by the IRS. However, I believe that the conclusions of the proposed ruling are valid and therefore you may wish to apply its principals even though the ruling has not been approved and released by the IRS. Facts For All Situations. In each of the four situations presented in the proposed ruling, an individual is the sole employee of an S corporation. The individual is also a shareholder of the corporation and owns more than two percent of the corporation's stock. Neither the shareholder nor the shareholder's spouse is covered by another subsidized health plan. Situation 1 - Shareholder Purchases Health Insurance and Shareholder Pays Premiums with No Reimbursement. The shareholder-employee purchases a health insurance policy in his own name and he makes all the premium payments. Conclusion. The shareholder-employee may not deduct the health insurance premiums as a self-employed individual under §162(l). Situation 2 - Shareholder Purchases Health Insurance and S Corp Pays All Premiums. The Shareholder lives in a state which does not allow a corporation to purchase a group health plan with only one participant. The S corp adopts a health plan for employees and their dependents that requires the sole shareholder-employee to purchase a health insurance policy and requires the corporation to make all premium payments. Conclusion. The insurance premiums paid by the S corp are included in the shareholder-employee's W-2 wages (but not in Social Security and Medicare wages) and the shareholder may deduct the premiums as a self-employed individual under §162(l). Situation 3 - Shareholder Purchases Health Insurance, Pays Premiums and S Corp Reimburses Premiums Paid By Shareholder. The Shareholder lives in a state which does not allow a corporation to purchase a group health plan with only one participant. The S corp adopts a health plan for employees requiring the shareholder-employee to purchase a health insurance policy and to make the premium payments. The plan also requires the S corporation to reimburse the shareholder for the premium payments upon proof that the insurance is in force and is being paid for by the shareholder-employee. Conclusion. The insurance premiums paid by the S corp are included in the shareholder-employee's W-2 wages (but not in Social Security and Medicare wages) and the shareholder may deduct the premiums as a self-employed individual under §162(l). Situation 4 - Shareholder Purchases Health Insurance and Either S Corp Pays Premiums or Reimburses Premiums Paid by Shareholder. In this situation, state law does not prohibit a corporation from purchasing a group health plan with only one participant. However, the cost of a group health plan with only one participant exceeds the cost of an individual health insurance policy. For business reasons (lower cost), the corporation adopts a health plan that requires the sole shareholder-employee to purchase a health insurance policy and requires the corporation to make all premium payments or to reimburse the shareholder-employee for the premium payments upon proof that the insurance is in force and is being paid for by the shareholder-employee. Conclusion. The insurance premiums paid by the S corp are included in the shareholder-employee's W-2 wages (but not in Social Security and Medicare wages) and the shareholder may deduct the premiums as a self-employed individual under §162(l). Planning! From a review of the four situations included in the ruling, it is clear that the AICPA is suggesting that where the health insurance policy is not in the name of the S corp, the following should be done to ensure the deduction: The S corp should adopt a health plan for employees. This apparently means reducing the agreement to writing. The plan should provide that either a) the S Corp pay the health insurance premiums for the employees or b) the S corp reimburses the premiums paid by the employee upon receiving proof that the insurance is in force and that the premium has been paid by the employee.
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