Self-employed health insurance deduction

A 2% shareholder in an S corporation may deduct health insurance premiums in arriving at AGI, even if the insurance policy is in the name of the shareholder if:

• The premiums are paid by the S corporation, or paid by the shareholder and reimbursed by the S corporation prior to the end of the taxable year;
• The premium or reimbursement payments by the S corporation are included as compensation in the shareholder's W-2; and
• Otherwise qualify under IRC §162(l). (IRS Notice 2008-1) 

IRS Notice 2008-1 will appear in Internal Revenue Bulletin 2008-1 dated January 14, 2008. The Notice also provides that taxpayers may amend prior year returns if the shareholder did not deduct the premiums as self-employed health insurance, and they satisfy the requirements of Notice 2008-1. Taxpayers should write “Filed Pursuant to IRS Notice 2008-1” on the top of the amended return.

California conforms to IRC §162(l). However, we do not yet have any guidance from the FTB as to whether they will follow IRS Notice 2008-1. For a copy of the notice, please visit: http://www.irs.gov/pub/irs-drop/n-08-01.pdf.