Discussion:NOL and S Corp med insurance premium

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Discussion Forum Index --> Advanced Tax Questions --> NOL and S Corp med insurance premium


Discussion Forum Index --> Tax Questions --> NOL and S Corp med insurance premium

Smhlmp (talk|edits) said:

2 September 2009
I have a client who is an S Corporation and a home builder. In 2008 he incurred a significant net operating loss and was funding the S Corporation personally (so no problem with his basis). The NOL was carried back 2 years.

In 2008 the shareholder, in order to deduct his medical insurance, took a small wage of $1,500 plus his medical insurance premiums of $13,045 on his W-2, box 1, for a total of $14,545, as required. However, he was only able to deduct $1,500 of the medical insurance premium on line 29 of his 1040 and the balance, $11,545 was carried over to Schedule A, line 1 where it was disallowed on the carry back as non-business expense.

The IRS is taking the stance that the medical insurance premium that was carried over to the Schedule A, Line 1 is a non-business expense and therefore disallowed when computing the NOL carryback amount.

I believe it is a business expense as the wages reported on line 7 of his 1040 reflect the full insurance premium paid by the S Corporation and the disallowed amount is part of the business loss. However, I am having trouble finding any precedence to support my side. Does anyone know any court cases, rulings, regs or tax law that might be able to help me out?

Kevinh5 (talk|edits) said:

2 September 2009
I think that would be deducting them twice, Sm. Once on the corporate return and once on the 1040. You have to show that they were not deducted on the 1120-S (as compensation).

Smhlmp (talk|edits) said:

3 September 2009
Hi K - No they weren't deducted twice, the medical insurance premiums were reclassed to wages and included on the shareholder's W-2 as is required, not deducted as medical insurance premiums on the corporate return. So the shareholder took the premiums in as wages which then allows him to deduct on the 1040.

Riley2 (talk|edits) said:

3 September 2009
Someone made a similar argument in Tax Court. A taxpayer tried unsuccessfully to argue that alimony is a business deduction if it is paid out of business income. See TC Memo 1988-197.

It does seem unfair that the wages are treated as business income, but the deduction at the shareholder level is treated as a nonbusiness deduction.

However, this treatment is consistent with IRC 172(d)(4) and Reg §1.172-3(a)(3) which define nonbusiness deductions as deductions that are not attributable to the taxpayer's trade or business.

Derwood (talk|edits) said:

3 September 2009
Smh, there are no court cases or rulings that suppoet you belief that since he used his taxable wages to pay for medical insurance ... then those medical ins premiums must be deemd a business deduction, because his wages are business income.

If your concept is correct ,then his charitable contributions and property taxes paid with money he derived from wages must also be a business deduction.

Sounds like you have got some explaining to do to your client of why you messed up on his original 1040. Sometimes honesty is the best policy.

Riley2 (talk|edits) said:

3 September 2009
If it were my client, I would argue that the premiums are “attributable” to the taxpayer’s business and would have been deductible on page one of the Form 1040 under Internal Revenue Code § 162(l) if the FICA wages had been $11,545 higher. The FICA wages would have been $11,545 higher if the plan discriminated in favor of “owners” as opposed to employees.

Derwood (talk|edits) said:

6 September 2009
Riley, fully insured mediacl plans are allowed to discriminate.

Riley2 (talk|edits) said:

6 September 2009
Yes, no argument there.

What I am saying is that if a plan is drafted so that it covers only shareholders, the FICA exclusion under Sec. 3121 does not apply and the shareholder's FICA wages will include the employer paid health insurance. In this case, the FICA wages would be $11,545 higher. If the FICA wages are $11,545 higher, then the Sec. 162(l) deduction for health insurance premiums will be $11,545 higher. If the Sec. 162(l) deduction is $11,545 higher, it would also follow that "business deductions" for NOL purposes will be $11,545 higher.

Interestingly enough, if this taxpayer were to operate as a sole proprietor, his Sec. 162(l) deduction would also have been $11,545 higher.

In my mind, there is no reason to limit the Sec. 172 definition of "business deductions" to those deductions that are allowed under Sec. 162.

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