Is this Deduction Legal?

[Dale Sr]

What is the name of your state? PA

I have spoken to about 5 or 6 tax accountants and 5 or 6 tax lawyers. About 1/3 answer yes, 1/3 say no and a 1/3 say take the deduction and see what happens.

Curious to see if there is a consensus here.

I am eligible to purchase a specific Health Insurance plan from Blue Cross that is only available to retirees of a Fortune 20 company that you all know. This company does not subsidize any of the costs. I pay 100% of the costs and I make payment directly to Blue Cross -- but it is a plan specific to "Acme, Co" retirees.

I am also a small business owner. When I purchase the aforementioned insurance, I pay the premium from my small business (a Schedule C pass through).

Can I account for this insurance as a business expense, thus reducing the tax liability to my business?

Those who say I cannot take the deduction say it is ineligible bc of the plan's connection to "Acme Co". The one's who say I can take it say it is fine bc the plan is not subsidized by "Acme Co". The others are unsure.

 

[FlyingRon]

It depends on the details that you've not given here. If you're a sole proprietor, it's not a business expense at all.
If your business is a corporation, it might or might not be. Here's the IRS guideance:

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

 

[Dale Sr]

It depends on the details that you've not given here. If you're a sole proprietor, it's not a business expense at all.
If your business is a corporation, it might or might not be. Here's the IRS guideance:

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

It is both. It is a Limited Liability CORPORATION (LLC) and a Sole Proprietorship. The link you provided is for S-Corps. This business is not an S-Corp so that link does not apply.

One thing all of the lawyers and tax accountants I have spoken with agree on is if I were to buy an insurance plan that is available to the public (e.g. from the Healhcare Market Place), it is absolutely allowed to be treated as business expense. The only question at play is buying a plan that is only available to Acme's retirees makes it inleigible.

Below are some relevant links:

https://www.policygenius.com/taxes/schedule-1/

https://www.calt.iastate.edu/taxplace/reviewing-self-employed-health-insurance-deduction

https://blog.taxact.com/the-self-employed-health-insurance-deduction/

https://gusto.com/blog/health-insurance/self-employed-health-insurance-deduction

https://www.irs.gov/pub/irs-wd/0524001.pdf

 

[davew9128]

How is the LLC treated for tax purposes and who is the policy for? These are the only items of fact that are of any relevance.
Since you state that this is a Schedule C, the answer is it is not a business expense. Period. End of discussion.

That anyone stated it was is disturbing. On many levels.

Oh and by the way, change your terminology. A Schedule C is NOT a passthrough.

 

[Dale Sr]

How is the LLC treated for tax purposes and who is the policy for? These are the only items of fact that are of any relevance.
Since you state that this is a Schedule C, the answer is it is not a business expense. Period. End of discussion.

That anyone stated it was is disturbing. On many levels.

Oh and by the way, change your terminology. A Schedule C is NOT a passthrough.

The policy is for me.

Profits from the sole proprietorship PASS THROUGH to my personal return via schedule c, which of course are subject to further treatment via schedule 1.

Many business expenses are deducted on schedule c before the profit PASSES THROUGH, including various insurances.

This practice is as common and basic as sliced bread—-as all the links I provided confirm. The only question is if this type of insurance purchased is eligible for an deduction/adjustment on line 17 of schedule 1.

 

[davew9128]

Profits from the sole proprietorship PASS THROUGH to my personal return via schedule c, which of course are subject to further treatment via schedule 1.

Request denied. A Schedule C is not a passthrough item it is the same as its owner.

Many business expenses are deducted on schedule c before the profit PASSES THROUGH, including various insurances.

I'm not going to repeat myself correcting your error.

This practice is as common and basic as sliced bread—-as all the links I provided confirm.

Your links are irrelevant to the question asked. Not to mention from mostly dubious sources.

The only question is if this type of insurance purchased is eligible for an deduction/adjustment on line 17 of schedule 1.

It is. Now move along.

 

[Dale Sr]

The IRS itself is a dubious source….hmm…

So now that you have FINALLY answered the question (with your opinion), thanks.

Interesting that so many people say it isn’t because it is a group plan (albeit unsubsidized).

I tend to agree with you BTW.

And you can say whatever you want but a SP is considered a Pass Through Entity—to say otherwise is simply wrong—-and disturbing on many levels.

 

[LdiJ]

What is the name of your state? PA

I have spoken to about 5 or 6 tax accountants and 5 or 6 tax lawyers. About 1/3 answer yes, 1/3 say no and a 1/3 say take the deduction and see what happens.

Curious to see if there is a consensus here.

I am eligible to purchase a specific Health Insurance plan from Blue Cross that is only available to retirees of a Fortune 20 company that you all know. This company does not subsidize any of the costs. I pay 100% of the costs and I make payment directly to Blue Cross -- but it is a plan specific to "Acme, Co" retirees.

I am also a small business owner. When I purchase the aforementioned insurance, I pay the premium from my small business (a Schedule C pass through).

Can I account for this insurance as a business expense, thus reducing the tax liability to my business?

Those who say I cannot take the deduction say it is ineligible bc of the plan's connection to "Acme Co". The one's who say I can take it say it is fine bc the plan is not subsidized by "Acme Co". The others are unsure.

If you are the one paying for the insurance, then yes, you can claim the deduction as a self employed person paying for health insurance. The fact that you happen to qualify for the insurance as a part of a group is irrelevant.

I am surprised that any of the professionals you consulted would answer any differently. Of course, if the company was paying for the insurance or it was subsidized, then different rules apply, but you still could deduct any amount you paid out of pocket.

 

[LdiJ]

It depends on the details that you've not given here. If you're a sole proprietor, it's not a business expense at all.
If your business is a corporation, it might or might not be. Here's the IRS guideance:

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

He is not talking about a business expense, he is talking about the above the line deduction for health insurance for self employed people.

 

[LdiJ]

Original poster: The reason why there is confusion on this thread is because you are calling it a "business deduction" when it is not. It is an above the line deduction that you qualify for, BECAUSE you are a sole proprietor.

Your terminology of "pass through" adds to the confusion because that applies to income and tax attributes that pass through from an S-corp, Trust or Partnership via a Schedule K1.

A Schedule C is not anything to do with "pass through" because it is simply a part of the 1040.

I suspect that the reason why you got different answers from different professionals was due to you using incorrect terminology. Clearly that is what happened on this thread.

 

[Dale Sr]

Original poster: The reason why there is confusion on this thread is because you are calling it a "business deduction" when it is not. It is an above the line deduction that you qualify for, BECAUSE you are a sole proprietor.

Your terminology of "pass through" adds to the confusion because that applies to income and tax attributes that pass through from an S-corp, Trust or Partnership via a Schedule K1.

A Schedule C is not anything to do with "pass through" because it is simply a part of the 1040.

I suspect that the reason why you got different answers from different professionals was due to you using incorrect terminology. Clearly that is what happened on this thread.

No. Their concern was clearly due to me buying a group plan.

What if I was purchasing a COBRA plan, 100% paid by me? Would your answer change?

Thx

 

[adjusterjack]

And you can say whatever you want but a SP is considered a Pass Through Entity—to say otherwise is simply wrong—-and disturbing on many levels.

There's where your terminology problem exists. A sole proprietorship is not an "entity," pass through or otherwise. It is a person engaged in business activities either under his own name or doing business as (insert business name here).

You are also using "pass through" in error when referring to an LLC. An LLC is a "disregarded entity" for income tax purposes. "Disregarded entity" is the proper term.

Single Member Limited Liability Companies | Internal Revenue Service (irs.gov)

It is both. It is a Limited Liability CORPORATION (LLC) and a Sole Proprietorship.

More confusion there. It's Limited Liability Company, not corporation. And how can you be both? Are you running two businesses? One as an LLC (Dale's Widgets, LLC) and another as a sole proprietorship (Dale Sr DBA Dale's Doohickies)? Or are you just confusing the two types of business. While I suppose it's possible for an LLC to be DBA (doing business as), it appears rather cumbersome.

I am eligible to purchase a specific Health Insurance plan from Blue Cross that is only available to retirees of a Fortune 20 company that you all know. This company does not subsidize any of the costs. I pay 100% of the costs and I make payment directly to Blue Cross -- but it is a plan specific to "Acme, Co" retirees.

I am also a small business owner. When I purchase the aforementioned insurance, I pay the premium from my small business (a Schedule C pass through).

Can I account for this insurance as a business expense, thus reducing the tax liability to my business?

I don't think the connection to Acme makes any difference.

Read Page 21 of IRS Publication 535 - Self-Employed Health Insurance Deduction

2021 Publication 535 (irs.gov)

It appears that you likely qualify for the deduction but it goes on Schedule 1, line 17, and there is a worksheet on Page 23 that you have to complete in order to figure the amount of the deduction.

 

[davew9128]

No. Their concern was clearly due to me buying a group plan.

What if I was purchasing a COBRA plan, 100% paid by me? Would your answer change?

Thx

The general feeling is that COBRA premiums do not qualify for SE health insurance deductions, because they are not for a health insurance plan established by the business, they are established under a former employer.

 

[LdiJ]

No. Their concern was clearly due to me buying a group plan.

What if I was purchasing a COBRA plan, 100% paid by me? Would your answer change?

Thx

I disagree with the previous answer that you got from Dave. I think that COBRA also qualifies. After all, you could easily opt out of COBRA and purchase health insurance elsewhere. It is not as though COBRA is any special deal anymore. It used to be, before the health insurance marketplace existed and it was the only way to get coverage if you had pre-existing conditions, but that is no longer the case.

I don't know why any tax professional would have a problem with you buying a group plan.

 

[Dale Sr]

A pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates.

https://taxfoundation.org/tax-basics/pass-through-business/