health insurance

[gman]

Is it required to take the self employed health insurance deductin. It eliminates some EIC the taxpayer could recieve.

[BHoffman]

From here:

http://www.eitc.irs.gov/rptoolkit/faqs/income/

"Revenue Ruling 56-407, 1956-2 C.B. 564, deals with the issue of taxpayers not taking all allowable deductions in computing net earnings from self-employment for self-employment tax purposes. Rev. Rul. 56-407 held that under §1402(a), every taxpayer (with the exception of certain farm operators) must claim all allowable deductions in computing net earnings from self-employment for self-employment tax purposes.

Net earnings from self-employment are included in earned income for EITC purposes. It is defined by cross-reference to the definition of net-earnings from self-employment under I.R.C. §1402(a). This ruling applies equally to the EITC. CCA 200022051 also provides insight regarding deduction of Schedule C expenses.

My client doesn't want to claim business expenses because it decreases the amount of EITC. As a tax preparer, what do I do?

A self-employed individual is required to report all business income and deduct all allowable business expenses (see above for source). They do not have the option of reporting what is most beneficial.

Explain the requirement and talk about the consequences of not filing an accurate return. You may also want to present your client with the new Publication 4717, Help Your Tax Preparer get You the EITC You Deserve. (Link to form but it's not on repository yet so link to EITC Central page). This publication explains preparer's due diligence requirements and the consequences of not filing an accurate return.

If your client insists on not claiming all expenses, due diligence dictates you do not prepare the return."

[FEDUKE404]

Otoh

I would think a case might be made that insurance expenses used for the adjustment to AGI might not be considered part of "all allowable deductions."

Such an expense does not reduce "net earnings" from the business.

Bring on the lawyers....

FE

[Dusty2004]

My 2 cents

I would think a case might be made that insurance expenses used for the adjustment to AGI might not be considered part of "all allowable deductions."

Such an expense does not reduce "net earnings" from the business.

Bring on the lawyers....

FE

If you do not take any valid deduction that increases the EIC you (the preparer) are asking for heavy fines.

[DaveO]

What about reporting the Health insurance payments on Schedule "A" instead?

[AJsTax]

It does reduce

SE income now.
Take the deduction or file a false return.

[gman]

thanks

was not sure if it would be considered a ordinary and necessary expense of the business

[ChEAr$]

If your client insists on not claiming all expenses, due diligence dictates you do not prepare the return."

I was about to suggest that you give client address of local IRS office and suggest he ask them. and if they okay it, get something in writing to bring to you so you may safely (for HIS own sake tell me) prepare the return.

[ChEAr$]

Wasn't there at least originally a requirement that the health insurance actually be a written plan formally adopted by the business?

One MIGHT argue that if it weren't formally adopted by even a schedule c filer those premiums do not qualify for the adjustment on page 1. Hmmmm....

[BHoffman]

What would we do with the SEHI if the EIC wasn't involved? We would certainly report it as SEHI. Why would the effect on EIC change that? It is what it is. This is not a gray area. Why in the world would anyone report on Sch A without the EIC?

IMHO: I realize we want to gain the largest refund possible for our clients. However, it is stuff like this that exposes ALL of us the highest scrutiny and penalties because it perpetuates the fraud that surrounds the EIC. Just report the SEHI as it would be reported under any other circumstance and let the EIC amount be what it should be.

I sent a potential client packing because she had a Sch C and qualified for EIC. I refuse to do those returns because of preparers who jerk the numbers around to game the system. Playing with the SEHI, not taking valid deductions, etc - do you really believe the IRS isn't all over this? Do you really want to play the audit lottery and risk the penalties to both yourself and your client? Do you really want that "friendly" visit from the IRS in order to "help educate" their "partners" about responsible preparation?

[LCP]

If you do not take any valid deduction that increases the EIC you (the preparer) are asking for heavy fines.

I had an EIC client this morning who was claiming way too much mileage! I got a kick out of knocking it down to a more realistic level.

We got to where we wanted to be but I was beginning to wonder if I might need to question whether he had receipts for every business expense.

[BP.]

Just report the SEHI as it would be reported under any other circumstance and let the EIC amount be what it should be.

Good EIC info & advice in your posts on this thread, BHoffman. Remember for 2010, as has been noted by AJs Tax, SEHI DOES affect SE net earnings, not as an adjustment to AGI, but right on the Schedule SE.