Section 162(l) allows sole proprietors to take a deduction in computing adjusted gross income. The definition of a self-employed individual for these purposes also includes a partner or S corporation employee who is a more-than-2% shareholder on whose behalf the partnership or S corporation pays the premium. In addition, a partner or S corporation employee-shareholder may pay the premium and be reimbursed by the partnership or S corporation. In both cases, the amount is to reported in the partner’s or employee-shareholder’s gross income. The health insurance deduction is for amounts paid during the taxable year for insurance that constitutes medical care for the taxpayer, his or her spouse, dependents, or a qualifying child.

Previously, IRS guidance indicated that such premiums were not deductible. In FSA 3042, the IRS stated that, because Medicare Part B is a federal program available only to those who qualify under the statute, it cannot qualify as a health insurance plan established by a taxpayer under a trade or business, a requirement for deductibility under IRC Sec. 162(I).

 

Prior IRS form instructions followed the position taken in FSA 3042. The 2009 Form 1040 IRS instructions stated that “Medicare premiums cannot be used to figure the [self-employed health insurance] deduction” (see page 31). Likewise, 2009 Publication 535 stated that “Medicare Part B premiums are not considered medical insurance premiums for purposes of the self-employed health insurance deduction” (see page 18).

 

In 2010 and 2011, however, the instructions for Form 1040 stated that Medicare premiums can be used to figure the self-employed health insurance] deduction (see page 29 of 2010 instructions and page 28 of 2011 instructions). The instructions for Publication 535 were also modified accordingly (see page 18 of 2010 and 2011 publications). Until CCA 201228037, however, the IRS did not issue any guidance signifying their change in position from FSA 3042.