For those who have wondered how the long-term care insurance self-employed tax deduction works for owners of S-Corporations, this straightforward explanation clears it up. Greater than 2% shareholders of S-Corporations can lower the cost of long-term care insurance with this tax deduction when you think it through.
The entire premium paid by the S-corp employer on greater than 2% shareholders should be included in the employee’s Form W-2 as taxable wages, but not subject to Social Security and Medicare taxes (see below). Then you deduct the age-based amount on Line 29 of Form 1040 as part of your self-employed health insurance deduction. Here is the age-based table for 2018. These numbers usually grow each January.
|Attained age before the close of the taxable year||Amount that counts as part of self-employed health insurance deduction in 2018
|40 and younger||$420|
|71 and older||$5,200|
If you pay the premium out of your personal checking account, the age-based amounts are deductible on Schedule A as medical expenses but as you know, you have to have medical expenses in excess of 7.5% of your adjusted gross income to enjoy that deduction. The percentage will go to 10% in 2019.
Here’s the total explanation that I have in my agent training materials in case you find it helpful, plus you can refer to S Corporation Compensation and Medical Insurance Issues, which corroborates IRS Notice 2008-1 in the following section.
S-Corporations: IRS Notice 2008-1 says that greater than 2% shareholder/employees of an S-corporation are also entitled to this deduction if the premium is paid by the S-Corporation and added to the shareholder/employee’s gross income. The premium payments are included in wages for income-tax withholding on W-2 but are generally not subject to Social Security and Medicare taxes. The net result is the LTC insurance premium amount lowers adjusted gross income on the first page of IRS Form 1040, then is included as W-2 salary. Some greater than 2% shareholders of S-corporations do this as they want the business to pay the premium for cash-flow purposes, rather than pay it out of their personal checking account. Plus, their salary is reported as “Compensation of Officers” on Line 7 of Form 1120S, which lowers their taxable business income.
Rule of Spousal Attribution: Some think if the greater than 2% shareholder’s spouse is an employee of the S-Corporation and doesn’t own any shares, 100% of all eligible health insurance including 100% of the LTC insurance premium (not the age-based amount) can be deducted on Schedule C as a business expense. This is not true. IRC Section 1372(b) treats the spouse of a more than 2% shareholder as also owning the shares owned by the more than 2% shareholder spouse. In other words, both spouses are treated as a greater than 2% shareholder even if all the shares are directly owned by only one spouse.
Disclaimer: This is in no way intended to impart tax advice and you should ultimately seek the advice of a competent tax professional.