QBI/SE insurance

[11Buster]

If an S corporation shareholder pays SE insurance personally and takes deduction on Schedule 1 of form 1040 (He also receives wages from the S corp), is the QBI income amount that flows through to him from the S corp reduced by this same amount, for the QBI deduction?

[itonewbie]

Yes, if that the premium was reimbursed and included as part of his wages on the W-2.

However, there is (or at least there was) a problem with this not flowing correctly for 2% shareholder-employees of S corps.  Please see this thread for more info: https://proconnect.intuit.com/community/lacerte-discussions/discussion/re-qbi/01/75726#M14730

[qbteachmt]

I read this as a bit convoluted and wanted to confirm/clarify.

If the person is paying their own Health Insurance Premium (not "SE insurance"), and the corporation is not paying it nor reimbursing for it through Payroll, then there is no corporate involvement in that cost.

If the corporation pays it directly to the insurer or as reimbursement to the shareholder as the insured, that needs to run through payroll, and that makes it part of Gross Labor costs as a taxable fringe benefit, so it becomes part of QBI computation.

And of course this person would also get wages, because that is required.

[11Buster]

You are correct as there is no involvement with the S corporation and the shareholder in terms of payment.  Shareholder paid the premiums himself, out of pocket.  I've entered on screen 39 (as he was enrolled he CA Care but received no PTC).  In that screen, I've linked it with the W2 he received from S corp.  This is then generating, I believe, the SE insurance deduction on line 16, Schedule 1.  However, the question I still have, is if the QBI flow through income from the S corp is reduced by this amount?Form 8895 instructions refer to SE insurance as one item not included in the QBI calculation, but doesn't elaborate as to if it is paid personally, it need to be deducted out.

[itonewbie]

Since the premium was not reimbursed by the S corp, this is not SEHI and is not a deduction for AGI.

[11Buster]

Hmmm, since Lacerte allows the option to link the SE ins either in screen 39 or 24 by selecting "Form W-2 - SCorp S/H (>2%)" to the insurance, it IS deducting from AGI.

[PhoebeRoberts]

I can tell Lacerte I have $250 of educator expense, and it'll reduce AGI by that, too. Lacerte doesn't opine as to whether you're preparing the return correctly.

If the premiums aren't included in Box 1 of the W-2, it's improper to link the W-2 to the SE health.

[qbteachmt]

"I've linked it with the W2 he received from S corp."

That link makes no sense to me, either. A W2 by definition means you are not Self-employed, and you stated this amount is not listed on the W2 because the corporation was not involved in this activity.

"This is then generating, I believe, the SE insurance deduction on line 16, Schedule 1"

The link you seek would be from a 1065 K1.

I found this great resource for you:

https://politoeppich.com/articles-of-interest/partnership-and-s-corporation-health-insurance-premium...

[TaxGuyBill]

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@11Buster wrote:

 In that screen, I've linked it with the W2 he received from S corp.  

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You should only link it if it QUALIFIES.  It only qualifies if the corporation paid for the health insurance (either directly or by reimbursing the shareholder/employee) AND that amount was corrected added to Box 1 of the W-2.  If those conditions were not met, you should NOT be linking it

Because the taxpayer does NOT qualify for the Self Employed Health Insurance deduction, that solves your QBI question.

[PhoebeRoberts]

For >2% S-corp shareholders (and deemed shareholders) who are doing it right, Box 5 wages from the W-2 is treated as SE income for purposes of the SE health insurance deduction.

The OP is not doing it right, though.

[11Buster]

What is OP and sounds like there is a 50/50 difference of opinion here.

[itonewbie]

No, @11Buster.  The opinion is unanimous.  Not sure how you read that there's a 50/50 split.

[rbynaker]

Rather than "what some random stranger on the Internet said", how 'bout checking out the IRS Notice on this stuff:

https://www.irs.gov/pub/irs-drop/n-08-01.pdf

Which, no-so-coincidentally, agrees with what the smart folks who got here before me said.

Rick

[TaxGuyBill]

Or the somewhat easier version to read in Publication 535:

https://www.irs.gov/publications/p535#en_US_2019_publink1000208843

[11Buster]

One respondent says if the amount is not included in box 1 of the W2, it shouldn't be linked to the SE insurance deduction and therefore not deductible , yet another states that box 5 wages are treated as SE wages and therefore qualifies for purposes of the SE deduction. 

[itonewbie]

@11BusterYou should re-read the responses.  Those responses are about how to do it right but your setup is not correct.

[itonewbie]

If you are insistent on doing it your way, there is nothing we can do to convince you otherwise.  We tried to answer your questions and explain the technicality, Rick even providing a link the the IRS' own publication, but you appear to be no longer interested in the answers you solicited.

If I were you, I would re-read all the posts to better understand the discussions (with the backdrop being the premium paid does not qualify for above-the-line SEHI deduction).

[TaxGuyBill]

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@11Buster wrote:

One respondent says if the amount is not included in box 1 of the W2, it shouldn't be linked to the SE insurance deduction and therefore not deductible , yet another states that box 5 wages are treated as SE wages and therefore qualifies for purposes of the SE deduction. 

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Both are needed to qualify.  Read the links you were given.

[11Buster]

Not trying to do "things' my own way.  It is hard for me to decipher all the responses, links, etc. form all of you.  I am grateful but just wanted a simple answer to my seemingly straightforward question.

[itonewbie]

You had been given the answer.  It doesn't qualify as SEHI and cannot be taken as above-the-line deduction.

[itonewbie]

You now have the perfect opportunity to provide some value-add services to your client.  Based on all the discussions today, you should be able to advise your client on how to structure the insurance payment properly going forward, to take advantage of the SEHI deduction and not leave money on the table.

[11Buster]

On another note...assuming the amounts was paid or reimbursed by the corp and correctly included in W2 wage, in essence there is a "double dip" in terms of the deduction from QBI.  One at the corporate level, as the deduction for the premiums paid reducing net distributable (QBI) income to the shareholder and then again when deducted on personal return as it has to be subtracted again.  I believe this was in the draft regulations but there was a push to eliminate the double deduction.

Also, how do I get a copy of this entire thread as I am new to the community.

[TaxGuyBill]

If I remember correctly, the double subtraction is based on an Frequently Asked Question from the  IRS, but logic dictates that would be the incorrect treatment.

[TaxGuyBill]

There is no 'clean' way to print the thread.  Just print it from your browser.

[11Buster]

It seems a wash, if you ask me from a tax standpoint.  If the amount is included in W2 wages, it is offset with deduction on tax return.  QBI is unaffected in the end.  Obviously the advantage is the S corp picking up the premium tab.

[itonewbie]

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@TaxGuyBill wrote:

If I remember correctly, the double subtraction is based on an Frequently Asked Question from the  IRS, but logic dictates that would be the incorrect treatment.

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I recall this is what we discussed in a relatively lengthy thread when 199A was first enacted.  We expected the regulations to address that but they didn't.  This, however, is a problem that is unique to S corp as partnerships can get around that by adjusting the distribution instead.

Ah, found it.  Here's the thread: https://proconnect.intuit.com/community/lacerte-discussions/discussion/lacerte-says-the-qbi-deductio...

[itonewbie]

Mathematically, it is not a wash.  If this was structured correctly, assuming your client doesn't itemize, he'll, theoretically, lose only 20% of the SEHI deduction through the QBI adjustment.  As it is, 100% is lost.

[qbteachmt]

"What is OP"

You are. You are the Original Poster = the person asking.

"and sounds like there is a 50/50 difference of opinion here"

Nope; it's you against everyone else. We all pointed out it has to be part of Payroll, or it doesn't qualify for business and not for QBI, either, because they never "ran it through" the business.

You are overlooking all the activity, here: "If the amount is included in W2 wages, it is offset with deduction on tax return. QBI is unaffected in the end. Obviously the advantage is the S corp picking up the premium tab."

There is no Wash; there is a shifting for reporting.

The Corporation has gross payroll cost, and your client personally has more Taxable income for purposes of Medicare and Social Security. The employer does not have to withhold for Federal Income taxes against the taxable Fringe Benefit, because this person is known to qualify to include this on their 1040 tax return.

Higher Gross Income <== shareholder increase

Higher Gross Expense <== Corporate 1120S

1040 Deduction reduces Gross <== shareholder

the Net = just One deduction happens.

"This, however, is a problem that is unique to S corp as partnerships can get around that by adjusting the distribution instead."

Years ago, S Corp would manage this as Distribution. Then, the IRS started examining what was happening with distribution "abuse" in general. Everything changed. This is the type of thing you would stay current on as part of continuing education and tax regulation updates.

"I am grateful but just wanted a simple answer to my seemingly straightforward question."

Not done with the company = Personal Only. Not QBI, not 1120S, not business. These are the details we learned when you answered our questions and we got better details and more perspective; that always helps you get specific answers.