Health Insurance for Owners of Subchapter S Businesses
Owners of businesses that file taxes on Form 1120S are entitled to deduct premiums paid for health insurance as an adjustment to reduce income on Form 1040 IF that business pays wages to the owner(s) as employees and issues W-2’s. But there is a certain correct way to do that so it will stand up to IRS scrutiny.
If premiums are paid by the Subchapter S business (they should be), those premiums should be recorded as health insurance expense. If the premiums have been paid personally by the Subchapter S owner(s), the business should make a journal entry to record the premiums paid as health insurance expense and as a reduction of distributions or draws taken by the owner(s).
Here’s the key step that must be taken NOW: Total health insurance premiums paid for 2018 must be recorded on the owner’s W-2 as an addition to box 1 wages and as an entry in box 14, and your payroll service provider must be made aware of that and the total amount of premiums paid in 2018 well before the end of December. Doing this will trigger the reporting of health insurance premiums as both income and as a deduction for the owner(s). So, for the owner(s), it’s a wash on their Form 1040, but they benefit by their Subchapter S business being able to deduct that expense.
Not following the methodology outlined above could result in the premiums being disallowed as a Subchapter S deduction or being pushed to Schedule A of the owner’s Form 1040 as a medical deduction, where they will probably lose some or all of their value as a deduction because of the new tax law and the limitation on deducting medical expenses.
2018 Meals, NOT Entertainment
BEGINNING IN 2018 ENTERTAINMENT EXPENSES ARE NOT DEDUCTIBLE!
For tax years through 2017, businesses could deduct 50% of the cost of meals and entertainment expended for a legitimate business purpose. Under the new law (TCJA), entertainment expenses, even for business purposes, are no longer deductible.
Business related meals are still 50% deductible. Meals provided to employees on the business premises for the convenience of the employer had been 100% deductible through 2017. Under the new tax law, such meals are only 50% deductible.
WHAT ARE ENTERTAINMENT EXPENSES?
Entertainment expenses are incurred when a business, either for itself or its employees, or for clients or customers, incurs expenditures to attend an event other than a business meal. Usually the purchase of tickets is involved. Such events would include but not be limited to athletic events, plays, movies, charitable events (previously 100% deductible). This makes the cost of season tickets and related seat license fees non-deductible; and seat license fees paid to a university can no longer be considered a charitable contribution.
WHAT RECORDKEEPING CHANGES MUST A BUSINESS MAKE?
While it is still legal for a business to incur entertainment expenses, those expenses can no longer be deducted from taxable income. If your business has incurred any entertainment expenses after 2017, those must be separated from what has generally been categorized as “Meal and Entertainment” expenses. Businesses with entertainment expenses should set up an account for meals and a separate account for entertainment. It also means reviewing expenses already posted in 2018 and reclassifying any entertainment expenses to the newly established “Entertainment” expense account.