Repayment of Premium Tax Credit - Sole Prop vs S Corp

Scenario 1:

Client is a sole prop. Is not covered by medicaid or health insurance through a W-2. Buys health insurance coverage and receives an advance Premium Tax Credit. Let's say the client pays $2,000 in premiums during 2022, and when the return is complete in spring of 2023 the client must repay $1,000 of advance PTC. We take a Self-Employed Health Insurance deduction of $3,000 on the client's 2022 return that includes the SEHI premiums paid during calendar year 2022 and the repayment of PTC in 2023.

Scenario 2:

Same facts as scenario 1 except for the following changes: Client is organized as an S Corp. The S Corp reimburses the client for the cost of SEHI premiums paid during 2022 and we include the $2,000 of premiums on the client's 2022 W-2. In spring of 2023, we finalize the client's 2022 tax return and the client must repay $1,000 of advance PTC.

Questions --

Is the $1,000 repayment of advance PTC in Scenario 2 deductible in 2022 or 2023?

If 2022, how do we handle that? Must we do a benefit correction, probably for Q4 2022, that would require an amended 2022 Q4 941 and an amended 940 (maybe not the latter as tax doesn't change). And a corrected W-2?

What we've usually done in these situations is a journal entry to reclassify some distributions as SEHI reimbursement for 2022, and then do a Form W-2c (this is necessary to take the deduction on Schedule 1). No Form 941-X is needed (the instructions say not to file a Form 941-X if you're only changing the amount of income subject to federal income tax). I wouldn't bother filing an amended Form 940 since the tax isn't changing. And if the amount of APTC repayment is small, we just forgo it.

That being said, I see no reason why you couldn't treat it as 2023 SEHI.

Interesting. I had the same thought regrading the 940. For the 941, it's not a big deal that the total on the original 941s isn't going to reconcile to the W-2C?

That being said, I see no reason why you couldn't treat it as 2023 SEHI.

Same. Time value of money theory suggests taking the deduction sooner rather than later is always better, everything else being constant.

Interesting. I had the same thought regrading the 940. For the 941, it's not a big deal that the total on the original 941s isn't going to reconcile to the W-2C?

The IRS reconciles boxes 2, 3, and 5 of Forms W-2 to lines 3, 5a, and 5c of Forms 941, and they'll send you a nastygram if they don't mtach. They don't reconcile box 1 of Form W-2 to line 2 of Form 941. So no, it's not a big deal at all.

That being said, I see no reason why you couldn't treat it as 2023 SEHI.

Same. Time value of money theory suggests taking the deduction sooner rather than later is always better, everything else being constant.

Right, sooner is better, except in the unusual circumstances when it isn't.

I'm not aware of any rule that says that you can't reimburse for something months or years after the fact. And as I understand, the timing of the SEHI deduction on Sch. 1 and the income on the Form W-2 and the deduction on the Form 1120S all happen at the same time. And that means that if the S corporation is on the cash method, it's when the S corporation pays for it.

I don't bother going back and correcting the W-2 for PTC repayments, but I do include it as additional SEHI deduction.
As long as the shareholder has sufficient Box 5 wages to support the deduction, I don't see any harm here. I also feel it's administratively burdensome and inappropriate to change the W-2 for something that can't possibly be known until after the close of the year.
Since the PTC repayment is not cash paid by the shareholder for insurance (it's a tax payment), I feel it is also inappropriate to include it on the subsequent year's W-2 as a reimbursement for insurance because it isn't.

Here's how I see it; in Scenario 2, when the shareholder is charged the $1,000 on their federal return for repayment of the advance PTC, they would submit that expense to the corporation for reimbursement at that time, which would allow for deduction in 2023.

If I remember correctly, there are special rules for figuring the SE health deduction with the PTC. Those are in Pub 974.

https://www.irs.gov/publications/p974#en_US_2021_publink100023658

I don't bother going back and correcting the W-2 for PTC repayments, but I do include it as additional SEHI deduction.
As long as the shareholder has sufficient Box 5 wages to support the deduction, I don't see any harm here. I also feel it's administratively burdensome and inappropriate to change the W-2 for something that can't possibly be known until after the close of the year.

This makes a lot of good common sense, very practical, but I think technically incorrect. I guess if it got audited, you could always just do the Form W-2c then.

Since the PTC repayment is not cash paid by the shareholder for insurance (it's a tax payment), I feel it is also inappropriate to include it on the subsequent year's W-2 as a reimbursement for insurance because it isn't.

Because it isn't what? It isn't insurance? Or it isn't insurance for the appropriate year?

Regarding whether the APTC repayment counts as insurance, the IRS instructions indicate that it does count as insurance in the year accrued (not paid), in the case of a Sch. C self-employed taxpayer. See Pub. 974 page 57. A better way to describe it is this: The gross insurance premium (before APTC subsidy) qualifies for the SEHI deduction, except that it has to be reduced by the amount of net PTC (and further modified if there is an APTC repayment limitation). That takes the timing aspect out of it, which is clearer for Sch. C individuals than for an S corporation. And the APTC repayment counts as insurance expense because you're essentially reimbursing the government for the insurance that they paid for on your behalf.

For those thinking about doing W-2cs in this situation, are you also changing the S corp return? Does your answer change whether the corp is on a cash basis or accrual basis?

Because without a change to the S corp return, preparing a W-2c after reconciling the premium tax credit would affect taxpayer income, which changes the ACA subsidy, thus changing the cost of insurance, necessitating a further correction to the W-2c, which again changes taxpayer income, necessitating yet another correction to the W-2c...

I don't bother going back and correcting the W-2 for PTC repayments, but I do include it as additional SEHI deduction.
As long as the shareholder has sufficient Box 5 wages to support the deduction, I don't see any harm here. I also feel it's administratively burdensome and inappropriate to change the W-2 for something that can't possibly be known until after the close of the year.
Since the PTC repayment is not cash paid by the shareholder for insurance (it's a tax payment), I feel it is also inappropriate to include it on the subsequent year's W-2 as a reimbursement for insurance because it isn't.

This is my approach, 100%. W-2s are generally reported on the cash basis while ACA insurance is handled on the accrual basis (the iterative calculations of SEHI and the fact that January 2023 insurance is usually paid in December 2022). It's inconsistent but welcome to tax law.

I agree. Yes, the Form 1120S needs to reflect the expense for SEHI. This can cause a circular/iterative problem. Fortunately, we haven't had an actual circular problem on these S corp situations in real life yet. Also, as I mentioned, we're forgoing the deduction sometimes when it's too small to be worth the effort.

But I think your conclusion (cash basis for the W-2, etc.) is correct, and this stuff can be pushed out to the next year's W-2 and delay the deduction to that next year if so desired.

Regarding whether the corporation is on the cash basis: Generally we've been able to just recharacterize payments to the shareholder as being a reimbursement for the insurance (including APTC repayment as insurance); therefore, it's an expense for the S corporation even on the cash basis.

Fundamentally, I don't see a reason that this:

And as I understand, the timing of the SEHI deduction on Sch. 1 and the income on the Form W-2 and the deduction on the Form 1120S all happen at the same time.

to be always true. With non-Marketplace insurance, it is. But Reg § 1.162(l)-1 gives specific guidance on calculating SEHI when Marketplace plans are involved, overriding Notice 2008-1. Because wages are on a cash basis, but the SEHI deduction is accrual basis for Marketplace plans, it should be perfectly normal, reasonable, and possibly expected to have a timing difference.

Because of this, It seems that the proper answer is to report $2,000 in wages in 2022 and take a $3,000 SEHI deduction in 2022. I do not see a requirement for the corporation to reimburse the shareholder the remaining $1,000 paid. That said, I do not see a prohibition on the corporation reimbursing the shareholder either, including $1,000 as Box 1 wages and deducting it on the S corp return, provided that the shareholder does not deduct the $1,000 as SEHI in 2023.

Interesting. SEHI isn't deductible for S-corp owners unless the S-corp pays for (or reimburses) the insurance premiums. And when the S-corp does pay for (or reimburse) the insurance premiums, it gets reported on Form W-2 (and also deducted, if the corporation is on the cash basis). We're on the same page here, right?

So I see the logic in what you're saying - the SEHI deduction would always be taken on Sch. 1 on the accrual basis (maybe not for non-Marketplace insurance), but the W-2 would be on the cash basis, and there would be a timing difference, which is ok so long as the S-corp does actually eventually reimburse the insurance cost.

As a philosophical question: if the situation was reversed -- the premiums were $3,000 and the taxpayer received a premium tax credit of $1,000 when filing the tax return -- would the shareholder be required to return the $1,000 to the corporation?

Interesting. SEHI isn't deductible for S-corp owners unless the S-corp pays for (or reimburses) the insurance premiums. And when the S-corp does pay for (or reimburse) the insurance premiums, it gets reported on Form W-2 (and also deducted, if the corporation is on the cash basis). We're on the same page here, right?

So I see the logic in what you're saying - the SEHI deduction would always be taken on Sch. 1 on the accrual basis (maybe not for non-Marketplace insurance), but the W-2 would be on the cash basis, and there would be a timing difference, which is ok

Full agreement with this.

so long as the S-corp does actually eventually reimburse the insurance cost.

I don't believe that to be the case, but I'm not 100% confident of it. The plain reading of §36B says that the reconciliation payment on the tax return is an addition to tax. Under that logic, as a tax and not a health insurance premium, it would not be required to be included on the W-2 to be compliant with Notice 2008-1.

As a philosophical question: if the situation was reversed -- the premiums were $3,000 and the taxpayer received a premium tax credit of $1,000 when filing the tax return -- would the shareholder be required to return the $1,000 to the corporation?

I agree, this is an issue. But I don't have a good, fully consistent/logical answer to this.

Perhaps the answer is that anytime a corporation reimburses for Marketplace health insurance, they must be provided with a copy of the tax return, so that, under the accountable reimbursement plan, it can be proven that there was no PTC and therefore no excess reimbursement. Would you take that position?

If not, therefore it would seem that no excess reimbursement need be returned when there's a PTC (after all, this reimbursement was included in taxable wages on the W-2, which is the recourse when you don't comply with an accountable reimbursement plan), and the S corporation deducts it as wages and includes it on Form W-2 box 1, but the SEHI deduction on Sch. 1 must be reduced so that it is smaller than the W-2 SEHI income by the amount of the PTC.