medical expenses on S corp return

[oceanlovin'ea]

New client with S corp brings me his worksheets for income and expenses. I asked for check register and bank statements. I have return finished.
Wife does the payroll twice a month and does all the payroll reports. She also did the W-2.

She comes in for final consultation to iron out a few questions. I tell her I notice that she has included health insurance in box 1 wages, but noticed that it wasn't paid from the business account. She tells me that it is not health insurance. She has insurance through the company where she works. But it is actually the medical expenses they had to pay out during the year. She said the other accountant told them they could do it. An entry was made to take the expenses paid out of the draw account.
The explanation in box 14 just says medical ded. so I am sure IRS would think it was health insurance.

I told her I had not heard of that deduction being allowed before and that I would do some research. I see nothing in anything under s corp, but there is something under fringe benefits for employees.

What do I not know about this situation? Is this an allowable deduction? If so, I have been missing the boat on a lot of returns for years.

Linda, EA

[Maribeth]

New client with S corp brings me his worksheets for income and expenses. I asked for check register and bank statements. I have return finished.
Wife does the payroll twice a month and does all the payroll reports. She also did the W-2.

She comes in for final consultation to iron out a few questions. I tell her I notice that she has included health insurance in box 1 wages, but noticed that it wasn't paid from the business account. She tells me that it is not health insurance. She has insurance through the company where she works. But it is actually the medical expenses they had to pay out during the year. She said the other accountant told them they could do it. An entry was made to take the expenses paid out of the draw account.
The explanation in box 14 just says medical ded. so I am sure IRS would think it was health insurance.

I told her I had not heard of that deduction being allowed before and that I would do some research. I see nothing in anything under s corp, but there is something under fringe benefits for employees.

What do I not know about this situation? Is this an allowable deduction? If so, I have been missing the boat on a lot of returns for years.

Linda, EA

They probably have set up a medical reimbursement account, which can be tax-free to employees but has to be included in shareholder wages for S-corp owners.

Maribeth

[ChEAr$]

They probably have set up a medical reimbursement account, which can be tax-free to employees but has to be included in shareholder wages for S-corp owners.

Maribeth

If there is indeed a medical reimbursement account in place, ask to see a copy of the plan as sanctioned by the board of directors.

You can't just do something and say that "I planned to do it." grin

[oceanlovin'ea]

I didn't know that S corps could do that. I have missed that in all my reading about s corps.

Any references you know of to back that up. (I believe you...just would like to have it to show others in writing.)

Thanks

Linda, EA

[Gretel]

Not close to my office, it's either code section 105 or 106.

[Jiggers]

I didn't know that S corps could do that. I have missed that in all my reading about s corps.

Any references you know of to back that up. (I believe you...just would like to have it to show others in writing.)

Thanks

Linda, EA

IRS Pub 15-B, Employer's Tax Guide to Fringe Benefits.

Page 7.

[Davc]

Discrimination rules apply.

[dsi]

Not where I can look it up, but I thought that >2% SH couldn't use this?

[oceanlovin'ea]

I read IRS pub 15B and on page 3 it says that this doesn't apply to s corporations. But then later it talks about highly compensated employees.

I also read IRS Code 105(h).

So which ruling takes precedence here? If it doesn't apply to s corporations, then it doesn't matter if they are highly compensated or not, does it?

I also noted that it didn't really mentioned being reimbursed for medical bills not paid under insurance plan.

Linda, EA

[Gretel]

I read IRS pub 15B and on page 3 it says that this doesn't apply to s corporations. But then later it talks about highly compensated employees.

Linda, EA

Linda, in my opinion this simply means that S-Corp. shareholder cannot get this fringe benefit, hence it needs to be included in the W-2 and then, can be deducted on the 1040, Sch. A. This actually makes sense only if shareholder has a HSA.

[oceanlovin'ea]

you are right, Gretel. They are actually paying tax on that money twice. They paid taxes on it when they earned it. Now they are using it to pay medical bills and adding to his wages and paying tax on it again. I don't think they itemize any more so no deduction for it.

Not really a smart thing to do.

I take that back......it is a deduction on the s corp return so it does lower income on personal return. But it lowers it on k-1 and increases on w-2. so that is a wash. If they can't deduct it anywhere else it is just extra work.

Linda, EA