S-Corp is the partner - SE Health Ins

Technical topics regarding tax preparation.
#1
Lmaris  
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I have a physician client whose MDPA (S-Corp) is the partner in the partnership for whom he is an employee.

The partnership issues him a W-2 showing the health insurance premiums they paid on his behalf in addition to his not-insignificant wages. Partnership also issues his MDPA a K-1 reporting the insurance benefits as guaranteed payments.

He does not take wages from his S-Corp, only distributions which roughly mirror net income.

My firm's position in prior years was to consider his employer-subsidized health insurance to be SE insurance premiums because he included it in S-Corp income. This is my first year with this firm, and I disagree with this position. My reasoning is as follows:

(A) he was not an employee of the S-Corp, and
(b) the premiums were paid as a subsidized plan of his employer.

Sure, he included his cost in income, but the way he structured his ownership interest to avoid SE tax on his entire partnership income and his S-corp income outside the partnership, he's made himself ineligible for this deduction.

Thoughts?
 

#2
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I agree this has been arranged inappropriately.

He should be the employee of his s-corp. Is he enrolled in their cafeteria plan or retirement plan(s)? He can still participate as an employee of his s-corp, if this is a concern.

IMO (and I have three folks structured this way), the wages paid to him currently should be GPs to his s-corp. The health insurance should be included as a GP too. The S-corp pays him a wage and reports the health insurance in Box1 (no FICA), which drives a SEHI deduction on his 1040.

No wages from his s-corp is pretty low hanging fruit for the IRS. I'd stop that practice right away.
~Captcook
 

#3
Lmaris  
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155
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Location:
Texas
Thanks for the validation.

His S-corp is getting GP from partnership but only for the amount of health insurance. All the rest is flowing as ordinary income.
 

#4
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CaptCook wrote:He should be the employee of his s-corp. Is he enrolled in their cafeteria plan or retirement plan(s)? He can still participate as an employee of his s-corp, if this is a concern.


As I read this again, it seems misleading...he can still participate in the retirement plan, but he's ineligible for the cafeteria plan either way.
~Captcook
 


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