IRS Modifies Rule for Deducting Health Insurance Premiums By S Corporation 2-Percent Shareholders

IRS has issued as a Notice a proposed revenue ruling drafted by the American Institute of Certified Public Accountants (AICPAs) that allows a 2-percent S corporation shareholder-employee to take an above-the-line deduction for accident and health insurance premiums paid (or reimbursed) by the S corporation (and included in the shareholder’s gross income) on a policy in the shareholder’s name rather than in the name of the corporation.   The Notice clarifies an issue that arose in 2006 when IRS stated that an S corporation 2-percent shareholder could not deduct medical insurance premiums except as premiums paid by a self-employed person, and then only if the policy was in the corporation’s name.  Now, IRS says that if the corporation pays the premium directly to the insurance company, or pays the shareholder the amount of the premium as a reimbursement, then the shareholder can deduct the premium as a self-employed person.   The IRS’ change of position has implications for practitioners in terms of filling-out IRS Form W-2 and filing amended returns for open years to reflect the new rule.

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