Tax Law (Questions About Taxes)/Deducting Health insurance through LLC
QUESTION: Hi Richard,
My wife and I are partners in an LLC (LLC A, I'll call it)that will show no income for 2014 -- in fact, I did a preliminary K1 and we each show a loss, because we paid for health insurance premiums through this business. 2014 is the final tax return for that business.
Meanwhile, my wife has another LLC (LLC B)with a non-family partner, that did show a good income for 2014. I am not a partner in this business.
When looking at my tax software, it tells me to check out Publication 535 to see if I can deduct the cost of the health insurance premiums -- I've found seemingly conflicting information online, with some sources saying that the business that PAID the health insurance premiums (LLC A)has to show profit of at least the amount of the health insurance premiums, or the deduction is limited.
However, I've seen other sources that say that as long as it's the same basic trade, you can combine the income of both LLCs in this case. Both are Interior Design Businesses, basically the same business, just with a different partner.
My question is, On worksheet 6-A (page 20) of Publication 535, looking at lines 4-14, is there a way to present these numbers and qualify to deduct the full amount of the health insurance premiums? If so, how and where?
And if not, is there any other way to deduct the full cost of the premiums as a 1040 line 29 self-employed health insurance deduction? What would be the alternative? If we have to list it as part of Schedule A, won't we lose out on a large part of the benefit?
Final note: the insurance was paid as a single policy for me, and as a separate parent and children policy for my wife and two kids.
It might have been dumb to continue paying for the health insurance from what we knew would be a "dead" LLC, but it seemed the easiest way, since distributions from LLC B went to my wife's LLC A account before being paid out. But the accountant, on the 2014 LLC B tax return, had a K-1 that listed the distributions as being paid to my wife individually, not to LLC A.
He already filed LLC B's return, and when I asked him if I'd have any trouble deducting these premiums on LLC A's return, which I'm doing, he said no, but didn't get into specifics. But I'm wondering if I need him to redo the LLC B K-1 to reflect money being paid to LLC A, which seems like it would solve all the problems. Because then LLC A has income, we deduct the cost of the health insurance premiums with no problem. Or does that become a big deal for him to re-do that?
Thanks for any help. As you can see, I'm desperate for answers!
ANSWER: You are swimming in very muddy waters, so it is hard to see where you are going.
Let's clear some of this up.
LLC's and taxes:
the LLC is a disregarded entity. It pays no taxes and therefore gets no deductions. It can show expenses but all of the businesses financial activities are attributed to the individuals who will attempt to take deductions on their personal tax return.
Insurance premiums are not a "medical expense" per se.
The "Premium" is a personally, itemizable deduction.
Does "Itemizing" your deductions to include your medical premium, net you more tax savings than your standard deduction?
Medical expenses are the extra costs like deductibles and co-pays and prescriptions, and non-prescriptions and etc. Those "Medical expenses" are subject to your personal 10% of adjusted gross income limitation. That means that if your Adjusted Gross personal income is $50,000 and you had $5212 in medical costs (not including your insurance premium) you would be able to deduct $212. But save just the taxes on that $212 dollars, and if you are a married couple with $50,000 of adjusted gross income you would be in the 15% tax bracket. 15% of $212 is $31.80.
I know, medical insurance is EXPENSIVE and somewhere there was a promise that it was going to save money. But that is almost never true. It is all fear mongering to push more cost on the consumer.
---------- FOLLOW-UP ----------
QUESTION: Hi Richard,
Thanks for the answer. I understand the pass-through nature of the LLC, but when I fill out the tax return (1065) for the LLC, there are entries that determine whether health insurance premiums are paid through the LLC, and they reach the K-1, before being passed to the 1040. The problem is that if I report them on LLC A, which has no income to offset, I'm worried that they might be disallowed when the IRS reviews the 1040.
The main question is the nature of the IRS wording of "trade" on page 20 of Pub. 535. It says to enter the net profit and other earned income from the TRADE or BUSINESS under which the insurance plan is established. If I take that literally, meaning only applying to LLC A, which the premiums were paid through, then I can't deduct on the 1040 as self-employment insurance. If it means the wider "trade" of interior design, then I can get away with it, and see a much bigger deduction.
So the question is, what is your interpretation of that wording in my situation?
Welcome to tax matters 201.
There are no hard and fast rules. It is all left up to interpretation. Can you defend your interpretation of that section of the rules, as reasonable?
What ultimately matters in the application of the tax code is what YOU believe.
The IRS wants you to convict yourself, and they will give you every opportunity to change your mind, and if you do, they will demand that you are wrong and be penalized.