Q:

Subject: COBRA Premium Deductions

 

Hi,

I'm an owner/employee of a c-corp (the only owner/employee), and I'm currently paying COBRA premiums to a previous employer for health insurance continuation.  I'd like to write this off as a fringe benefit from the c-corp to the employee (me).  I'm not sure if I can do this, I have researched ths HSA, and have found that I'd be able to use the HSA's fed-tax-free funds to reimburse myself for COBRA premiums, but I'd rather not open the HSA, plus it's capped at $5450 for the family in 2006.

Is there another way that the c-corp can reimburse me for the COBRA premiums w/o me being taxed on the personal side?  Also, I realize I can write off the COBRA premiums on the personal side subject to above the 7.5% of AGI garbage, but that's peanuts.  If not, what a kick in the shorts, I'm unable to secure my own health insurance, or else I know I could write those premiums off, so the IRS adds insult to injury?  Hmmm, unable to get your own health insurance, and using COBRA?  IRS says:  Sorry, can't deduct that, if you were healthy though...you could deduct normal health insurance premiums!!!

On another topic, I am using an income shifting technique between personal tax year-end and the c-corp tax year end.  And this helps me out quite a bit for this year due to the first year of incorporation and stretching it beyond my 12/31 personal tax year-end, but in what ways can I use the corporations $$$$ to pay me for services that will not be included as income to me?

Thanks.

A:

As I constantly warn, these are not the kinds of things you should be doing on your own.  You need to work with an experienced professional tax advisor for such matters as shifting income between fiscal years and shifting it between the corp and your 1040 with the lowest overall tax hit.  There are far too many variables to take into account for me to even suggest what would be the most appropriate for your unique situation.

In regard to the medical expenses, the answer is quite easy. When you draw up your corporate resolution establishing the medical benefit plan, include the fact that the COBRA premiums will be included as one of the covered types of costs. 

It would be best to then have the actual premium payments made with corporate checks so that no money goes into your personal account.  If that's not possible for some reason, and you have to pay the premiums out of personal funds, you can have the corp reimburse you for it.  It will then be critical to properly document that the money was spent for that purpose.  My personal preference is to post the reimbursement to the same expense account in your personal QuickBooks file as the underlying payment was posted to so that it nets out.  However, some accountants prefer to post these in a different manner, so you need to coordinate this with your own personal professional tax advisor. 

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Thank you for the advice on the COBRA payments, and thanks for such a quick response.  I am working with an accountant at this time, but he mainly deals with s-corporations.  I was looking for a bit more color on some of the scenarios you presented here regarding income-shifting: http://taxguru.org/corps/scorp.htm , but I do understand your disclaimer regarding unique situations, etc.

Thanks again, your web site, and your blog are very insightful...BUT, of course not a substitute for the real deal, my very own tax professional ;)

The information you present, provides me with ideas and talking points when it comes time to meet with the professionals, so thanks again for your efforts.

My Reply:

That is a bit scary, to be working with a tax pro who is a one trick pony.  In this day and age, effective tax, asset protection and wealth management planning require a good understanding of the interplay between several kinds of entities, such as trusts, FLPs, LLCs, S corps and C corps, in addition to the standard 1040 Schedules C, E & F.  Any tax pro worth his/her salt needs to know those kinds of things or else it is impossible to provide decent service to clients.

If you haven't already done so, you should check out my tips on how to select the right tax preparer for you. 

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 7/23/2006 08:39:00 PM Send this post: