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2-PERCENT S CORPORATION SHAREHOLDER-EMPLOYEES

MAY DEDUCT HEALTH INSURANCE PREMIUMS:

TAXPAYERS MAY FILE AMENDED RETURNS

A 2-percent shareholder-employee of an S Corporation is entitled to a deduction for the expense of health insurance premiums paid during the tax year, if certain requirements are met. The Internal Revenue Service (the "IRS") issued clarifying guidance in Notice 2008-1 (the "Notice") on December 13, 2007. The Notice explains the rules under which a 2-percent shareholder-employee in an S corporation is entitled to a deduction for accident and health insurance premiums under Internal Revenue Code (IRC) §162(l). The rules follow:

1. Either the S corporation must make the premium payments for the accident and health insurance policy, or, the 2-percent shareholder must make the premium payment and furnish proof of payment of the S corporation and then be reimbursed by the S corporation;
2. The S corporation must report the accident and health insurance premiums paid or reimbursed as wages on the 2-percent shareholder-employee's Form W-2; and
3. The 2-percent shareholder-employee must report the premium payments or reimbursements from the S corporation as gross income on his or her Form 1040 Income Tax Return.

The Notice reasons that IRC § 162(l) provides a deduction for self-employed individuals for the cost of accident and health insurance premiums paid during the taxable year. Partners may deduct the cost of premiums paid by the partnership to the extent provided by IRC §162(l). IRC §1372(a) treats 2-percent shareholder-employee of an S corporation as a partner of a partnership for purposes of applying the rules related to employee fringe benefits. Therefore, a 2-percent shareholder-employee of an S corporation, like a partner, may deduct the cost of the accident and health insurance premiums.

Taxpayers who meet the requirements of Notice 2008-1 but did not claim deductions for accident and health insurance premiums described above may file timely amended tax returns to claim the deduction under IRC §162(l). The statement "Filed Pursuant to Notice 2008-1" should be written on the top of any amended return.