S Corp Health Insurance 2018

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Update: 2018 Health Insurance for S Corporation Owners

S corporations continue to enjoy good news in 2018 when it comes to health insurance, and this also applies to 2017 taxes.

You first have to thank the 21st Century Cures Act for:

  • Reinstating and extending IRS Notice 2015-17 to eliminate the $100-a-day penalty
  • Creating the qualified small employer health reimbursement account (QSEHRA) that works well if there are employees in the corporation

The good news is, the old rules still apply as we write this, and we don’t expect any changes in 2017 or 2018. Under these rules, the S corporation first establishes a health insurance plan for the owner in one of two ways:

  • Choice 1. The S corporation makes the premium payments for the accident and health insurance policy covering the owner-employee who has more than 2 percent ownership (and his or her spouse or dependents, if applicable).
  • Choice 2. The owner-employee makes the premium payments to the insurance company and furnishes proof of the premium payments to the S corporation, which in turn reimburses the owner-employee for the premium payments.

This is Step 1—getting the cost of the insurance on the S corporation’s books.

In Step 2, the S corporation has to include the health insurance premiums on the owner-employee’s W-2 form. The income is not subject to payroll taxes (Social Security and Medicare).

In Step 3, the owner-employee then claims the health insurance deduction on page 1 of Form 1040, providing he or she otherwise qualifies for the page 1 deduction.

Could renting from your spouse result in tax savings?

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The short answer is maybe. This strategy targets saving self-employment taxes. Entities that give rise to self-employment taxes are sole proprietors and general partners in partnerships. This means that if you have an s-corp, c-corp, or are a limited partner you are not subject to self-employment taxes. If you are a sole proprietor read on for more information on this tax savings tip.

Rent from your Spouse Strategy

As a sole proprietor, you know that the 15.3 percent self-employment tax can eat up your profits in a hurry. You may be able to use a simple strategy for tax savings.

If you own an office building or other assets, you can set up a rental arrangement with your spouse that could significantly cut your self-employment taxes.

Example

Wendy operates a sole proprietorship and earns $100,000 of net income. This income creates a self-employment tax liability of $14,129.55.

Wendy gives the office building to Jim, her spouse, who then rents the office space back to Wendy. Wendy pays Jim $2,000 rent each month (the fair rental value of the building), which moves $24,000 off Schedule C and onto Schedule E. Schedule E, unlike Schedule C, does not give rise to self-employment taxes. (15.3%)

Tax Savings

The rent-from-my-spouse strategy cuts Wendy’s self-employment income by $24,000, which puts an extra $3,391.09 of cash in her pocket at the end of the year. And she plans on doing this for at least 10 years, which means she’ll pocket $33,910.90 in tax savings before considering her investment earnings on this money.

Tax Law Changes – NOL Rules

TL;DR

NOL Changes –  No carrying back losses for immediate benefit. Can only offset 80% of taxable income in future years.

Changes to Net Operating Losses After Tax Reform

Tax reform made many good changes in the tax law for the small-business owner. But the changes to the net operating loss (NOL) deduction rules are not in the good-changes category. They are designed to hurt you and put money in the IRS’s pocket.

Now, if you have a bad year in your business, the new NOL rules are designed to stop you from using your business loss to find some immediate cash. The new (let’s call them bad-for-you) rules certainly differ from the prior beneficial rules.

Old NOL Rules

You have an NOL when your business deductions exceed your business income in a taxable year. Before tax reform, you could carry back the NOL to prior tax years and get refunds of taxes paid in those prior years.

Alternatively, you could have elected to waive the NOL carryback and instead carry forward the NOL to offset some or all of your taxable income in future tax years.

New NOL Rules

Tax reform made two key changes to the NOL rules:

  1. You can no longer carry back the NOL (except for certain qualified farming losses).
  2. Your NOL carryforward can offset only up to 80 percent of your taxable income in a tax year.

The changes put more money in the IRS’s pocket by

  • eliminating your ability to get an immediate tax benefit from your NOL carryback, and
  • delaying your ability to get tax benefits from future NOL carryforwards.

We are bringing the NOL rules to your attention in case you need to do some planning with us. We likely have some strategies that can help you realize some immediate benefits from your business loss.