S corp Insurance when not an employee

[BulldogTom]

S-corp has insurance plan but no employees. Owners do not take salary. One owner participates in health plan. Premiums paid by S corp. Where do I imput this on the K-1 and allocate to this shareholder to make taxable on his 1040? Is there a place for this on the k-1?

Thanks

Tom

Lodi, Ca

[JohnH]

Tom: Sounds like this could be an unequal distribution which could invalidate the S-corp election.

[kcjenkins]

BTW, it's just inviting an audit, to have no salary for a shareholder who gets any other income from the business, you know.

[OldJack]

By default the IRS considers an officer of the S-corp an employee regardless of salary. That is the theory behind reclassifying distributions. If there are no distributions/payments to the officer there is no amount subject to recapture as salary. Its not likely the IRS will audit if there is not enough income to support a salary. Any taxable benefit does not go on a k-1, but should be reported on a W2 even if the officer did not take a salary.

[BulldogTom]

This s-corp is 18 years old. Normally profitable, but not the last two years. Looking at last year tax return prepared by someone else, it looks like they did it a bit "creatively". Added the payments as supplemental information on the K-1. Premiums not deducted at Corp level. No mention of a book to tax difference on the reconcilliation. They just made it go away, but put it on the K-1. Scratching my head on this one, because the CPA who prepared it is very well known in town. The clients could not get another CPA to take it. They have some level of apprehension about the preparation last year and shopped this year's work. They came to me because I rented my office from them a few years ago.

I think the clients are just looking to do the right thing, and they are not sure it was right last year.

In reading up on this in my Master Tax Guide, I think the corp can deduct the payments. I think the shareholder must bring the amount of the premiums paid into income, and because it is income to him, he has earned income (like a guaranteed payment to a partner). If the corp was profitable, the shareholded could deduct as SE Health Insurance, but because there will be a loss on his K-1, only to the extent that he has net earnings from the corp (net of K-1 loss and Premiums paid on his behalf taken into income) can he deduct as SE health insurance on his 1040.

Am I anywhere close on this?

Thanks for your help.

[imjulier]

Tom, my 2 cents. Premiums should have gone on a w-2 to the one who benefitted. Amount of premiums in box 2 with no withholdings and not subject to SS or MC. Its not too late to file a w-2 if you do it electronically....I think due by the end of March. Premiums are deducted on the 1120S and since they are now on a w-2 also deductible by the taxpayer on the front of the 1040 as SE health insurance. Note that all this makes it tax free ....this is how all S corp SH premiums should be handled and is technically correct.

Technically not correct but perhaps easier is to not do w-2, deduct on 1120S, not deductible on 1040. Same end result of being tax free but you are getting there a different way. IRS doesn't approve of this way but its the same bottom line.

Julie

[kcjenkins]

Tom, I agree with Julie. I'd also put this on a W-2. It is only a little more work, but it gets it all where it should be, in the most correct manner, and even avoids the entire 'no W-2' issue.

[grmy2h]

I have always issued W-2's for the shareholders' insurance on an S-Corp and never had any problems. As far as I know that is the correct way to report it.

[BulldogTom]

Thanks to you all.

I will discuss with the clients.

Tom

Lodi, CA

[OldJack]

While I agree with reporting it on a W2 and deducting it on the S-corp, I question doing it now after the year tax returns have all been filed. Really, what would that accomplish as it does not change the tax for anyone and is just more paperwork for the IRS and the client. You did not make the mistake on last years return so I would leave it alone.

>>The clients could not get another CPA to take it<<

I would bet because they want it done cheaper.

[BulldogTom]

<<I would bet because they want it done cheaper.>>

I would bet you are right. They told me so. Funny how losing money makes people look for a bargain.

I am not looking to amend last years return. Let that dog lie right where it is. But I do want this year to be professionally done and audit proof. That is the way I work.

Tom

Lodi, CA

[BulldogTom]

Tom, my 2 cents. Premiums should have gone on a w-2 to the one who benefitted. Amount of premiums in box 2 with no withholdings and not subject to SS or MC. Its not too late to file a w-2 if you do it electronically....I think due by the end of March. Premiums are deducted on the 1120S and since they are now on a w-2 also deductible by the taxpayer on the front of the 1040 as SE health insurance. Note that all this makes it tax free ....this is how all S corp SH premiums should be handled and is technically correct.

Technically not correct but perhaps easier is to not do w-2, deduct on 1120S, not deductible on 1040. Same end result of being tax free but you are getting there a different way. IRS doesn't approve of this way but its the same bottom line.

Julie

Julie, did you mean Box 1 of the w2? Box 2 is federal withholding. If we do the W2, box 1 would be amount of Premiums, all other boxes blank.

Is this the correct way to do this?

Thanks.

Tom

Lodi, CA