If you are a self employed tax payer, only portions of your health
insurance premiums are tax deductible in 1999.
However, there are many ways you can deduct ALL your health insurance
costs.
Using the usual forum of an Industry Specialization Program (ISP)
paper, the IRS has approved a controversial "back door
approach".
Background: As a general rule, an employer can deduct all the
health insurance premiums it pays on behalf of employees, including
coverage for the employees family. The employer-paid coverage is also
tax-free to the employee. In contrast, self-employed business people
can only claim a percentage of their health insurance premiums as an
above-the-line deduction.
The allowable percentage for 1999 is 60%. (Eventually, this figure
will increase until it reaches 100% in 2003 and thereafter).
Common Situation: Your spouse often helps out in your self-employed
business. By hiring your spouse as an official employee, you can
provide him/her with deductible health insurance coverage. And you are
covered through the "backdoor" as the spouse of an employee.
Tax Consequences: In a prior Revenue Ruling, the IRS said that
medical plan reimbursement paid by a self-employed taxpayer to his
spouse who was one of his employees were fully deductible and tax free
to the spouse. (Rev. Rul. 71-588, 1971-2 CB 91)
Results: By covering the medical expense of each employees family,
the self employed owner effectively deducted his own insurance costs.
A subsequent private letter ruling implied that a self-employed
could use this ruling even if the spouse was the sole employee of the
business. (PLR 199409001).
Previously, this strategy was considered to be risky by some tax
experts. Now the IRS has provided definitive guidelines in the new ISP
paper.
The paper says that the cost of health insurance, including medical
reimbursements, is fully deductible as long as the spouse is a bona
fide employee. Part-time status is acceptable unless services are
minimal or insignificant. Similarly, the cost of the coverage or
reimbursement is tax free as long as the spouse actually performs
applicable services for your business.
To benefit from this new tax break, your health insurance plan must
specify that an employee spouse is eligible to participate in this
plan.
Suggestion: Establish a waiting period or service requirement to
obtain coverage under that plan, especially if other employees have
previously been excluded from coverage for that reason.
NOTE: The IRS says the back door approach can’t be used by more
than 2% owners of S Corporations. That’s because an employee-spouse
of the owner is treated as an owner for certain fringe benefit
purposes, including health insurance plans.
REA Reporter,
Certified Public Accountants, August 1999, Post Rd, Columbus, OH
43017-1117 and seven other Ohio locations. Accounting assistance can
be obtained by calling (614) 889-8725.
