Is this Deduction Legal?

[Dale Sr]

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.

And thus the dilemma and disagreement….

 

[Dale Sr]

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.

Do you believe the same concern would apply to a plan established by a former employer for its retirees? How is that OK but COBRA isn’t?

Isn’t the real issue whether or not the cost is being subsidized by the former employer? As long as I am paying for it all, shouldn’t it all be deductible?

 

[Taxing Matters]

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/

That definition is not quite right. A pass through entity is one in which the income of the entity is passed through to its owners and taxed their returns. Here, there is a distinction between someone who is simply self employed as a sole proprietor and a person who owns a LLC and is taxed like a sole proprietor. The true sole proprietor is the one who earns the income, that income is not passed through to anyone else. But with a single member LLC, it is the LLC that actually earns the income but the tax law passes through the income to the single member owner and the LLC is disregarded (unless an election was made to treat the LLC as a corporation). So a true sole proprietorship is not a pass through arrangement, but a single member LLC would be, even though the federal tax law treats both situations as pretty much the same.

 

[Dale Sr]

That definition is not quite right. A pass through entity is one in which the income of the entity is passed through to its owners and taxed their returns. Here, there is a distinction between someone who is simply self employed as a sole proprietor and a person who owns a LLC and is taxed like a sole proprietor. The true sole proprietor is the one who earns the income, that income is not passed through to anyone else. But with a single member LLC, it is the LLC that actually earns the income but the tax law passes through the income to the single member owner and the LLC is disregarded (unless an election was made to treat the LLC as a corporation). So a true sole proprietorship is not a pass through arrangement, but a single member LLC would be, even though the federal tax law treats both situations as pretty much the same.

So, since mine is a single member LLC, mine is in fact a pass through, correct?

 

[Taxing Matters]

So, since mine is a single member LLC, mine is in fact a pass through, correct?

Technically, yes. After all, outside the tax world, the single member LLC (SMLLC) is regarded as a separate entity from the single member who owns it. But for most tax purposes the regulations (and IRS) ignore the SMLLC and treat the single member exactly the same as a sole proprietorship of the owner/member. This is unlike a partnership (including a LLC with more than one member) or S-corporation in which the IRS and regulations do recognize the partnership/S-corporation and those entities file their own returns, and then pass through their income to their members/shareholders. With a single member LLC (SMLLC), the LLC is not recognized and does not file its own income tax return. So the income is simply attributed from the get go to the single member owner. This odd arrangement for SMLLCs means that you have to read the tax law, regulations, and court decisions regarding them carefully to determine where you fit in any given situation. It is a unique animal, as it were, even though for practical purposes when it comes to federal tax it's often just easier to think of the business as a sole proprietorship. The problem is that doesn't always work, and some tax practitioners and taxpayers fall into the trap of thinking that in all instances the outcome will be the same with a true sole proprietorship and a SMLLC.

 

[Dale Sr]

Technically, yes…..

Thank you.

Do you also have an opinion on the legality of me taking the deduction offered on line 17 of schedule 1 if I purchase the insurance through COBRA or a group plan only available to retirees of “Acme Co”?

In both cases, I would be paying 100% of the premium. There would be no subsidization by Acme or anyone else.

 

[LdiJ]

And thus the dilemma and disagreement….

Just FYI. I AM a tax professional. I have been for pushing 40 years now. This past week I averaged 16-18 returns a day and today I expect to do the same. I am just about to leave for work.

 

[davew9128]

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/

Taxfoundation.org has more errors than the Boston Red Sox infield defense.

 

[Dale Sr]

Taxfoundation.org has more errors than the Boston Red Sox infield defense.

See the response from "TAXING MATTERS" as well.

 

[davew9128]

See the response from "TAXING MATTERS" as well.

TaxFoundation's website is full of errors. Fact. Found a pretty big one regarding a California tax matter on foreign income when a professional colleague of mine was providing tax continuing education and they used a screen shot of TF's website as background info on the topic at hand.

As for YOUR question, the issue is whether the health plan is established under the business. Without spending any time researching code or regs on the matter, any COBRA policy is by definition not going to be established under the business of the taxpayer. The fact that you're getting people with differing opinions should tell you something.

 

[Dale Sr]

As for YOUR question, the issue is whether the health plan is established under the business. Without spending any time researching code or regs on the matter, any COBRA policy is by definition not going to be established under the business of the taxpayer. The fact that you're getting people with differing opinions should tell you something.

Yes, that is that the core of the issue. Remember, everyone I have talked to in-person are experienced professionals. The disagreement comes down to whether or not they believe the true spirit of that law centers around subsidization or if the group plan cannot be established by another company even though I am the name of the insured regardless of subsidization.

Responses generally have fallen into the following camps:

1. The spirit of the law is what matters. And the spirit is around subsidization (and there are IRS memos to support that position). There is a link to said memo above...

2. The spirit (and memos) don't mean squat. Subsidization does not matter either. If another company is involved in any way, you cannot take the deduction. Period.

and lastly.....which is the one I tend to agree the most with....

3. Take the deduction. The chances of you being challenged on it are slim.....And if you are challenged, you have at least a 50% (likely greater) chance to win on the merits. It is not as if you are hiding income that could get you in big-time trouble. If you are challenged, make your case. If you lose, pay the tax --- there likely won't be any fees or interest due to an ineligible deduction (especially one in such a gray area) and you certainly aren't going to jail over $9,500.

Even in this thread, there are people in camps 1 & 2, which reinforces #3 probably being the best course of action.

 

[davew9128]

A reasonable approach. If you feel you can prevail on the merits, you're justified in taking the deduction.

 

[Taxing Matters]

here likely won't be any fees or interest due to an ineligible deduction (especially one in such a gray area) and you certainly aren't going to jail over $9,500.

Well, there would be interest due. There is no reasonable cause exception that would apply to get you out from paying interest. The good news is that, at least as things stand now, the interest rate is not terrible.