SE Health Ins From QBI on Entity Level

If I follow IRS FAQ 33 and deduct the shareholder health insurance on both the entity level & the 1040 - which seems completely unfair - but if I do this I have to make a manual adjustment because Lacerte does not do this automatically - but I ran across a situation today that makes it seem even crazier to me. This is a case where I have 2 shareholders & they each have a different amount of health insurance - I changed the numbers here to make it simple but this is basically my situation, any thoughts please?

Shareholders have 20/80 ownership and the 20% owner has 15k in health insurance and the 80% owner has 5k health insurance.

If I put the health insurance on other deductions on the entity level then the 20% shareholder will have to deduct 4k for health insurance and the 80% would deduct 16k. (Total health ins for both is 20k so (20,000 x 20% =4,000)

Then on the individual level the 20% owner would deduct 15k (his actual insurance) and the 80% owner would deduct 5k. That makes no sense at all - would that be how they are saying to do it? On a partnership return you can do special allocations but I don't think you can do that on a 1120S - so I think they would have to take the total health ins (20k) times the ownership percentage. I don't see how that could be right - any thoughts?

The SEHI premiums paid on behalf of shareholders should not be in "other deductions". Rather, they should be included in the appropriate shareholder-employee's W-2 wages and then deducted, subject to limitation, on Sch 1 of that shareholder's 1040.

And yes, SEHI premiums are an adjustment to QBI before it enters the calculation.

That's how I did it last year, but then I saw other people talking about this from IRS FAQ:

Q33. Health insurance premiums paid by an S-Corporation for greater than 2% shareholders reduce qualified business income (QBI) at the entity level by reducing the ordinary income used to compute allocable QBI. If I take the self-employed health insurance deduction for these premiums on my individual tax return, do I have to also include this deduction when calculating my QBI from the S-Corporation?
A33. Generally, the self-employed health insurance deduction under section 162(l) is considered attributable to a trade or business for purposes of section 199A and will be a deduction in determining QBI. This may result in QBI being reduced at both the entity and the shareholder level.

I've seen a lot of discussions on this and it seems like many people feel like it's not right, but until further guidance comes out we are supposed to deduct it at both entity & shareholder level. I've heard people say that Drake does this automatically, but Lacerte & Protax do not, I was thinking to err on the side of caution but it just makes no sense to me, especially in the situation I described in my original post.

I've seen a lot of discussions on this and it seems like many people feel like it's not right, but until further guidance comes out we are supposed to deduct it at both entity & shareholder level.

It absolutely is not right, and I for one am not double-deducting the health insurance for my clients.

I've seen a lot of discussions on this and it seems like many people feel like it's not right, but until further guidance comes out we are supposed to deduct it at both entity & shareholder level.

It absolutely is not right, and I for one am not double-deducting the health insurance for my clients.

Agree 100%.
SEHI is already deducted in s-corp for QBI. To take it again on the 1040 would be double deducting. IRS FAQs are not authoritative.

That's what I thought too but there is a facebook page for 199A I think it's started by Kevin Hutson and I remember him from the old taxalmanac days, to be one of the most knowledgeable people on the site. I don't remember if he specifically said you have to go by the FAQ or his partner but one of them said if you don't go by the FAQ you have to file 8275-R. I didn't think IRS FAQ had any authority at all by they seem to think it does.

I'm with those who believe that Q&A-33 reached the wrong conclusion.

In Q&A-33, the IRS states that the reason why the 2% shareholder must treat the SEHI deduction as a reduction of QBI is because it is attributable to a trade or business for purposes of 199A.

But in the case of a 2% shareholder, the SEHI deduction isn’t attributable to QBI from the S corporation (the flow-through income). Rather, it’s attributable to the shareholder's wages. This becomes clear when you read Notice 2008-1, which states that in order for the 2% shareholder to deduct the SEHI, the premiums either paid or reimbursed by the S corporation must be included on the W-2.

Since 199A(c)(4)(A) states that wages are not included in QBI, the SEHI, which is attributable to the wages, doesn’t reduce the QBI. Thus, in my opinion, the IRS’s conclusion in Q&A-33 is wrong. And Q&A-33 isn’t a regulation, so Form 8275-R isn’t required to be filed. You might consider filing Form 8275.

I'm with those who believe that Q&A-33 reached the wrong conclusion.

In Q&A-33, the IRS states that the reason why the 2% shareholder must treat the SEHI deduction as a reduction of QBI is because it is attributable to a trade or business for purposes of 199A.

But in the case of a 2% shareholder, the SEHI deduction isn’t attributable to QBI from the S corporation (the flow-through income). Rather, it’s attributable to the shareholder's wages. This becomes clear when you read Notice 2008-1, which states that in order for the 2% shareholder to deduct the SEHI, the premiums either paid or reimbursed by the S corporation must be included on the W-2.

Since 199A(c)(4)(A) states that wages are not included in QBI, the SEHI, which is attributable to the wages, doesn’t reduce the QBI. Thus, in my opinion, the IRS’s conclusion in Q&A-33 is wrong. And Q&A-33 isn’t a regulation, so Form 8275-R isn’t required to be filed. You might consider filing Form 8275.

Fully agree.