The Internal Revenue Service has come out with an interpretation that could affect the ability of some S corporation shareholder-employees to deduct health insurance premiums.
The guidance, given in IRS Notice 2008-1, affects taxation of health insurance premiums for S corporation employees who own 2% or more of the corporation’s stock, IRS officials write in the notice.
Section 1372(a) of the Internal Revenue Code says the IRS will treat S corporations as partnerships for the purposes of applying benefits tax rules.
Any “2-percent shareholders” of an S corporation will be treated as partners, officials write in the new notice.
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If an S corporation meets a variety of conditions, it can deduct the cost of benefits for 2-percent shareholder-employees from its own taxable income, officials write.
Section 106 of the Internal Revenue Code normally lets employees exclude health insurance premiums from taxable income.
The 2-percent shareholders themselves are not employees for purposes of Section 106 and cannot simply exclude health insurance premiums from their taxable income, officials warn.
The 2-percent shareholder-employees may be able to deduct health insurance premiums paid by S corporations if: