SE Health Ins. Deduction

[JoshinNC]

When determining the amount of deduction for a partner do you take into account Section 179 deduction?

Example - Partner has GP of $20529 and operating loss of -$5520. Additionally, partner has Section 179 deduction of $28,988. H/I premiums paid by LLC were $12,029. Is the income to base the deduction on $15,009 (GP minus loss) or -$13,979 (GP minus loss and 179)? Of course, if the former is correct than there is no deduction to take.

Thanks in advance!

[Bees Knees]

Good question, as the IRS Instructions and Publications seem to be silent.

So I went to the code for the answer.

Section 162(l)(2)(A) says no deduction is allowed to the extent that the health insurance exceeds the taxpayer’s earned income. The code defines earned income for a self employed taxpayer under Section 401(c).

Section 401(c)(2) defines earned income for a self employed individual as net earnings from self-employment, as defined in Section 1402(a), but with the following special rules:

• The taxpayer has to materially participate in the business.
• Income as a duly ordained minister or services by a Christian Science practitioner do not count.
• Earnings must be reduced by the deduction for a contribution to a self employed pension plan under Section 404, such as a contribution to a SEP, SIMPLE IRA, or qualified plan.
• Earnings must be reduced by the deduction for one-half of self employment tax under Section 164(f).

Since a deduction for Section 179 does in fact reduce earned income under Section 1402(a) for purposes of calculating self employment tax, then it must be factored into the equation when considering the limitation and the self employed health insurance deduction. Thus, when the worksheet for calculating the self employed health insurance deduction asks for net earnings from self employment, it is talking about the net earnings after taking the Section 179 deduction for a partner of a partnership.