The Deductibility of Health Insurance Expenses for LLCs
Health insurance premiums can be 100 percent deductible for members of a Limited Liability Company. The Internal Revenue Service allows deductions for premiums under certain circumstances for member managers, those members who are actively involved in the operations of the company.
The self-employed are able to deduct up to 100 percent of premiums paid for medical and dental insurance, and even long term care insurance for themselves, spouses and dependents. Because the IRS classifies single-member LLCs as sole proprietorships and multi-member LLCs as partnerships, member managers under these classifications report their shares of the company's profits as self-employment income and so qualify for the deduction. If an LLC, instead of accepting the default IRS tax classification, elects to be taxed as an S corporation, any member who owns at least a 2 percent share of the LLC and receives a wage from the company is also eligible to deduct up to 100 percent of health insurance premiums.
For LLCs taxed as a sole proprietorship, the health plan can be either in the name of the company or yourself since the IRS disregards the single-member LLC as a separate entity. In a multimember LLC treated as a partnership, the heath insurance plans must be considered to be established under the business, but the members can either pay the premiums themselves or the LLC pays the premiums and reports the amounts on Schedule K-1 of a partnership return as guaranteed income. But if the insurance plan is under the members' names and they pay the premiums themselves, the LLC must reimburse members and report the amount as guaranteed income or the plan is not considered to be established under the LLC. The qualifications for an LLC taxed as an S corporation are the same as that for one taxed as a partnership, except that the amounts paid or reimbursed by the LLC are reported on individual W-2 forms as part of gross income.
The health insurance premium is an “above the line” deduction, meaning it's included as part of your calculation of your adjusted gross income to your form 1040. As such, you don't need to itemize to take the deduction.
The amount of the deduction cannot exceed your share of the net profit of your LLC. You also cannot take the deduction for any month you were eligible for coverage under an employer-subsidized health plan, including a plan belonging to your spouse.
Normally, the health deduction is applicable only to reducing earned income subject to income tax and does not reduce the amount of income subject to self-employment tax. But the Small Business Jobs Act passed by Congress and signed by President Obama in September 2010 deducts health premiums when figuring self-employment income rather than just adjusted gross income, reducing the SE tax as well. The health premium provision of the jobs bill only affects tax returns covering 2010.