Is a Health Insurance Premium Tax Deductible With LLC?

By Jeff Franco J.D./M.A./M.B.A.

The Internal Revenue Service allows businesses to reduce taxable income by the amount of premiums it pays during the year to purchase health insurance for qualified individuals. A limited liability company is eligible to take the deduction. However, because LLCs are subject to various tax treatments, the type of taxation it is subject to dictates the eligibility requirements that must be met.

The Internal Revenue Service allows businesses to reduce taxable income by the amount of premiums it pays during the year to purchase health insurance for qualified individuals. A limited liability company is eligible to take the deduction. However, because LLCs are subject to various tax treatments, the type of taxation it is subject to dictates the eligibility requirements that must be met.

Employee Coverage

An LLC can deduct the cost of obtaining group hospitalization and medical insurance for all employees who are not members of the LLC. LLCs are eligible for the deduction regardless of the type of entity tax rules it is subject to. The deductible amount also includes the portion the LLC pays to provide employees with long-term care coverage. Qualified long-term care coverage includes the necessary health services an employee requires in the event she becomes chronically ill.

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Self-Employment Coverage

If the LLC is classified as a partnership or sole proprietorship, its members are considered to be self-employed. All self-employed taxpayers are eligible to deduct the cost of acquiring medical, dental and long-term care insurance for themselves, a spouse and all dependents. However, LLC shareholders that receive corporate tax treatment are not eligible to receive health insurance from the business unless they are bona fide employees. A corporation that provides non-employee shareholders with health insurance may not take the deduction on the corporate tax return.

Restrictions

An LLC member is ineligible to deduct the cost of health insurance for any month during the year the member is eligible to participate in any other employer provided health plan. It is irrelevant whether you take advantage of the other health plan or not. This is relevant to LLC members who have employment earnings from non-LLC activity or have a working spouse that is eligible to include the LLC member in a health insurance plan.

Taking the Deduction

Sole proprietors must take the deduction on the Schedule C attachment to a personal income tax return. If you incur other personal medical and dental expenses during the year that you include in itemized deductions, you must not include the insurance premiums that you deduct from LLC business income on Schedule C. If the LLC receives partnership tax treatment and pays the health insurance premium on behalf of the partner, the payment by the LLC is deductible on the partnership tax return. This gives the partner the same benefit of a deduction since the partner’s share of taxable income will decrease as a result of the partnership’s deduction. The reduction is reflected on each individual member’s Schedule K-1. Partners who pay the premiums directly can deduct the expense on a personal tax return. The corporation takes the insurance premium deduction on the corporate tax return on IRS Form 1120.

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What Expenses Can I Deduct as a Member of an LLC?

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Deducting a Salary for a Single-Owner LLC

Creating a limited liability company for your business instead of operating it as a sole proprietor affects your ability to deduct the salary you pay yourself on a federal tax return. As the single owner of the LLC, which the IRS refers to as a single-member LLC, you can choose to subject your business earnings to corporate or sole-proprietorship taxation. However, you can always deduct the salaries you pay to employees under both forms of taxation.

Can You File an LLC With Personal Taxes?

The Internal Revenue Service has yet to create a tax return for LLCs. The income and loss that a LLC generates is subject to federal taxation; however, the government requires you to utilize a corporate, partnership or personal income tax return to report the LLC’s earnings and losses. If the LLC receives corporate treatment for tax purposes, LLC members are precluded from reporting the income on a personal tax return.

What Can You Write Off on Taxes for an LLC?

The Internal Revenue Service treats LLCs differently for tax purposes than other types of entities insofar as members can choose the type of taxation to apply. The LLC is not liable for federal income taxes unless you elect to treat it as a corporation. Otherwise, the members are each responsible for a portion of the tax. However, the same business deductions available to a corporation are available to the individual members on a pro-rata basis.

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