Can a Sole Proprietor pre-pay health insurance premiums and deduct them?

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Chicago60
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Joined: Tue Jan 29, 2013 2:40 pm

Can a Sole Proprietor pre-pay health insurance premiums and deduct them?

Post by Chicago60 »

A sole proprietor can deduct on page 1 of her 1040 the health insurance premiums she paid, to the extent her sole proprietorship made profits. So, if she has monthly premiums of $2K in 2016, and profits in 2016 of $100K, the $24K in health insurance premiums are fully deductible on page 1 of her 1040. If, in late 2016, she expects 2017 will not be profitable, can she at the end of 2016 prepay some (or all) of her 2017 health insurance premiums, and deduct them in 2016 on page 1 of her 2016 tax returns?
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Pajamas
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Re: Can a Sole Proprietor pre-pay health insurance premiums and deduct them?

Post by Pajamas »

I'm not a tax lawyer or anything, but generally, no. See here:

https://www.irs.gov/publications/p535/ch06.html

Prepayment. You can't deduct expenses in advance, even if you pay them in advance. This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year.

Expenses such as insurance are generally allocable to a period of time. You can deduct insurance expenses for the year to which they are allocable.

Example. In 2016, you signed a 3-year insurance contract. Even though you paid the premiums for 2016, 2017, and 2018 when you signed the contract, you can only deduct the premium for 2016 on your 2016 tax return. You can deduct in 2017 and 2018 the premium allocable to those years.
Topic Author
Chicago60
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Re: Can a Sole Proprietor pre-pay health insurance premiums and deduct them?

Post by Chicago60 »

Thanks, I think your IRS citation answered the question.
avalpert
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Re: Can a Sole Proprietor pre-pay health insurance premiums and deduct them?

Post by avalpert »

Chicago60 wrote:Thanks, I think your IRS citation answered the question.
Not quite that simple - there are exceptions to that rule and depending on the timing of your insurance contract it may very well fit in. See this write up for more explanation and then you should read the actual regulations and talk to a CPA if you need to.
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Chicago60
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Re: Can a Sole Proprietor pre-pay health insurance premiums and deduct them?

Post by Chicago60 »

avalpert wrote:
Chicago60 wrote:Thanks, I think your IRS citation answered the question.
Not quite that simple - there are exceptions to that rule and depending on the timing of your insurance contract it may very well fit in. See this write up for more explanation and then you should read the actual regulations and talk to a CPA if you need to.
"Not quite" indeed. Thanks for the article.
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PaddyMac
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Re: Can a Sole Proprietor pre-pay health insurance premiums and deduct them?

Post by PaddyMac »

Also, if you buy equipment at the end of the year (like 12/30/16) so you can claim a tax deduction for that year, our CPA used to advise against this for a similar reason. You have to put the equipment substantially into service in the year you purchase it. So that's why it's good to do some tax planning, say when you do your quarterly taxes in Sept. That way the equipment is in service by October or so.

Have you worked through all the ways you can save money tax deferred? SEP-IRA - you can open up thru tax filing date including extn?
If you don't have a Solo 401k (although you need that opened by Dec. 31 of tax year) now might be the time to open one?

Are you taking advantage of all the Business Use of the Home deductions, assuming you work from home?
Last edited by PaddyMac on Sat Mar 25, 2017 10:05 am, edited 1 time in total.
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PaddyMac
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Re: Can a Sole Proprietor pre-pay health insurance premiums and deduct them?

Post by PaddyMac »

Also note that if you are buying health insurance on the exchange, and sign up for a new plan in December, there is no benefit to pre-paying the January premium in December - except to avoid the daily emails reminding you for pay your first premium!

We've had that issue for a couple of years, but always move the early December payment to Jan 1 on the books, so our account appears to show it was paid in the year the insurance was used.
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