Builders and Contractors Exchange
Weekly Bulletin: 21 Aug 2006
The Internal Revenue Service Denies Above-the-Line Deductions to Sole Shareholders in a Subchapter-S Corporation
By: Robert A. Desilets, Jr.
On May 15, 2006, the Internal Revenue Service issued guidance which considers whether a single shareholder of a Subchapter-S corporation could deduct healthcare premium payments paid by him or herself. The Internal Revenue Service had previously held that a self-employed individual, who had purchased health insurance in his or her own name, could consider such health insurance as having been purchased in the name of the Subchapter-S corporation. As a result, that individual could claim a deduction for the insurance premiums in determining his or her adjusted gross income, also referred to as an above-the-line deduction. In this case, an above-the-line deduction would be highly beneficial to the taxpayer because one hundred percent of the cost of the insurance premiums would be deductible by the taxpayer.
The Internal Revenue Service has reconsidered its position, however, and determined that an above-the-line deduction is not permitted by a single shareholder of a Subchapter-S corporation who purchases health insurance in his or her own name. The rationale behind the Internal Revenue Service’s position lies in the fact that the Subchapter-S corporation has not purchased the health insurance for the shareholder; rather, the shareholder has purchased the insurance on his or her own behalf. Because the Subchapter-S corporation has not established a plan to provide the coverage, the shareholder is not treated as a partner in the Subchapter-S corporation and is therefore not treated as being a self-employed individual. As a result, the Internal Revenue Service has held that a sole shareholder of a Subchapter-S corporation, who purchases health insurance in his or her own name, is entitled to a deduction equaled to only 7.5% of his or her adjusted gross income instead of the 100% above-the-line deduction.
In sum, a shareholder in a Subchapter-S corporation is not entitled to an above-the-line deduction, equaled to one hundred percent of the cost of the insurance premiums, where such shareholder is the sole shareholder in the Subchapter-S corporation. Instead, the Internal Revenue Service has limited the amount of the sole shareholder’s deduction for such healthcare premiums to 7.5% of his or her adjusted gross income.
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.