Deducting Health Insurance Premiums

The other day I took a phone call from one of our business clients. His business provides insurance services to other businesses. He asked me a very simple question, "I have a business client who has a group health insurance plan for him and his employees, and he needs to know whether or not he can deduct these expenses."



It became pretty clear to both of us, that although it may have been an easy question for him to ask me, the answer to that question is a lot more involved. Thanks to the prevalent use of pass-through taxable entities (S-Corps, and Partnership returns), and changes to tax provisions, deducting health insurance as a business owner is not as easy as paying the insurance bill.



If this business owner has a traditional C-Corporation the corporation would be able to deduct the full amount of the health insurance expenses as long as they have a qualified plan in place that covers all employees (without discriminating in favor of Highly Compensated Employees, or the business owners, or their families).



If this business is instead a Schedule C business or a single member LLC (disregarded entity) the business would not be able to deduct the portion of health insurance purchased for the business owner and/or his family. The health insurance expense for his normal employees (other than himself and his family) would be deductible. However, the portion of the expenses paid for his personal health insurance coverage would be includable on the front page of the business owner's personal income tax return (1040). Therefore, the business owner would be allowed to deduct on his personal return, personal health insurance expenses (to the extent that his business has earnings in the current taxable year). If the business owner had a loss for that same year, he would not be allowed to take the deduction on the front page of his personal return, but would instead include the expense on Schedule A (to the extent that health expenses exceeded 7.5% of AGI).



If this business is instead a S-Corporation, and the business owner is a more than 2% owner, the preferred method for deducting this expense is to include the amount as a "Gross-up" of W-2 wages to the owner/shareholder. This method is a little more involved, but basically at the end of the day, the deductibility is treated similarly to Schedule C business owners.



In conclusion, thanks to many changes in the tax code in recent years, businesses and individuals should be aware of costs and opportunities associated with business tax decisions. If you have concerns regarding your business's specific tax items, it is important that you use a qualified tax representative.

Private letter rulings

One of the major “insurance” opportunities the IRS offers for uncertain tax positions is called private letter rulings. These rulings are given to businesses and individuals on a case by case basis and cannot be relied upon by other taxpayers, but in the right instances can be very beneficial for taxpayers as a basis against an adverse IRS opinion. IRS private letter rulings cost between $625 and $11,500 (for a complex private letter ruling).

Business owners considering filing for a private letter ruling should do their homework before sending in a request for a private letter ruling as there are certain pitfalls associated with this type of filing, including:

1. You may have an issue that is already covered under an automatic or simplified method, that is both standardized and less costly than a private letter ruling.
2. Check IRS publications for matters that are already covered under statute, court decisions, revenue ruling, revenue procedure, etc as these have a higher standing as far as the IRS is considered than private letter rulings.
3. Make sure the IRS has not placed your topic of consideration on its “no ruling” list.
4. Seek guidance from the IRS directly. The IRS may be able to direct you to an IRS publication or revenue ruling that speaks to your issue directly.

Remember, an IRS private letter ruling may not always be the answer, but $650 may be much more tolerable than an adverse IRS ruling down the road with associated fees and penalties that can add up quickly.

Contributions to 401(k) and simple plans for 2010

401(k) and Simple contribution limitations have remained the same from 2009.

401(k) contributions are limited to $16,500 for individuals, with available additional ‘catch-up’ contributions available to those ages 50 years and older of $5,500 (total available contributions of $22,000).

Simple contributions are limited to $11,500, with additional ‘catch-up’ contributions available to those 50 years and older of $2,500. (for total available contributions of $14,000).

Eleven Easy Ways to Destroy Your Company

There was a great article written recently in the New York Times called ‘Eleven easy ways to destroy your company’. It is a short one page article highlighting the most common pitfalls of new and existing businesses that business owners might be too busy to keep in mind.

Check it out here:

http://boss.blogs.nytimes.com/2009/10/27/eleven-easy-ways-to-destroy-your-company/

Mileage rate 2010

The standard mileage rate for employers to reimburse employees for business use of a personal vehicle has been decreased from the 2009 mileage rate level.

For 2009 the standard mileage rate was 55 cents per mile.

For 2010 the standard mileage rate has been reduced to 50 cents per mile.

'Schedule C' business or 'Other Income'?

If you are one of the millions of Americans who receive a form 1099-MISC at year end, you may have trouble deciding how to characterize this income. If you are conducting a trade or business you would be required to file your business activity under Schedule C. If you are not, you would likely file this income on line 21, other income on your return. But this simple decision has very different tax effects, and may not be as easy as one might think.

The IRS has defined a trade or business as, “an activity carried on for a livelihood or in good faith to make profit.” Business activity can also be classified as one that is regular, frequent, and continuous. Businesses in this regard are not required to make a profit to maintain their status as a business, but must be furthering their business interests.

If you do not fall into that previous category then your income would most likely fall into the category of other income. Other income is not subject to self-employment tax, but the trade-off with this income type is that expenses are limited to the extent of the income you have received.

Please note that the fact that you have no intentions to continue the venture beyond one year’s time may not have any effect on whether or not you were conducting business activity during the time in which you earned income (one of the major misconceptions related with business activities).

Please also see the IRS small business/ self employed section for further information, or contact your tax adviser.

http://www.irs.gov/businesses/small/index.html

Long Term Care Insurance

Recently the IRS released guidance on the deductibility of Long Term Care Insurance. Long Term Care Insurance, has been around for many years, but compared to other insurance products this type of policy is considered a new type of insurance. These plans are designed to cover the rising costs associated with caring for yourself or your family as you grow older. There are many providers for this insurance, with many different coverage types, I will avoid the discussion of whether a policy makes sense for ‘you’ but rather focus on the concerns of a business owner considering the use of this policy.

Self Employed individuals:
Self employed individuals can generally deduct any LTC premiums paid for themselves, their spouses or dependents. In order to deduct these amounts, business owners must have a employer sponsored plan and deductibility would be limited to details specified in the plan document. Therefore LLC’s, S-Corps, and sole proprietors can deduct premiums for coverage of qualified members, subject to specific limits. Members are not allowed to participate if this coverage is available through their spouse, or through any other employer the owner works for, in addition to his business. In addition, businesses must have earned income to off-set with this payment, otherwise the amounts are non-deductible. Lastly, the amounts may be limited according to IRS rate tables that limit the extent of deductions for these types of contracts based upon age of the recipient (eligible LTC premium amount).

Employer/Employee relationships:
When an employer has employees and offers the employee group LTC coverage as a benefit of employment according to a plan written by the corporation, there are many potential benefits. One of the major benefits is that LTC insurance premiums are fully deductible and are not limited to the same income and personal age limitations that self employed individuals have to deal with (not limited to eligible LTC premium amount). Also benefits received are not included in the employee’s income and the employee can receive the LTC benefits tax-free. In this case, if you were an owner of a C-Corp, whom was also an employee, in theory there is no major difference between you and your other employees. Therefore, as long as your plan covers the employee group without consideration of ownership status, the owner-employee would be eligible for LTC insurance benefits.

Although, I have tried to provide plain-English explanations to this topic, please do not misconstrue this to mean that these plans are simple. If you have LTC planning considerations, please do yourself a favor and find a good insurance provider, and CPA that can go through potential benefits, and avoid costly mistakes associated with Long Term Care Insurance.

If you would like additional information on this topic please consult:
Code Sections: IRC 7702B; IRC 213(d)(1); IRC 162(1); IRC 162(a); IRC 106(a)
Finn, Daniel R., ‘Long Term Care Insurance and Tax Planning’ Journal of Accountancy. PP 44-47. August 2008 Edition.