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dfoster
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As a cash-basis S corp, If I pay my entire 2018 health insurance premiums (all 12 months) in 2017, can I take the deduction on 2017 taxes?

 
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As a cash-basis S corp, If I pay my entire 2018 health insurance premiums (all 12 months) in 2017, can I take the deduction on 2017 taxes?

Possibly.  Here is what IRS Publication 538 says about the deductibility of prepaid expenses:

"Expense paid in advance. An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following. 

(1)12 months after the right or benefit begins, or

(2) The end of the tax year after the tax year in which payment is made.

If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must obtain approval from the IRS before using the general rule and/or the 12-month rule."

So as long as your medical insurance prepayment is for not more than one year, it may be deductible in the year paid.

The last paragraph in the IRS information above means that if you paid any expenses in the past for a future year and did not elect to deduct them in the year paid under the 12-month rule, then you cannot apply the 12-month rule this year without getting prior approval from the IRS.  However, if you never before paid any such expenses in advance, then no prior approval is required as you are making an initial election to use the 12-month rule.

Note however that this election does not just apply to medical insurance premiums, but to any prepaid item.  So if you paid some other item in advance six years ago and did not elect the 12-month rule for that item, you cannot use the 12-month rule for this year's medical insurance premiums without applying for an accounting change through the IRS.  You may have inadvertently done something without even realizing you did it.  For example, paying your share of next year's property tax when you sold your home and taking the deduction in the year paid.  This effectively elects the 12-month rule without making an overt election.  Or not taking that same deduction until the next tax year, which effectively elects the general rule to the exclusion of the 12-month rule.

If the amount involved is significant, I would suggest you contact a qualified tax consultant to look at your specific situation.

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6 Replies

As a cash-basis S corp, If I pay my entire 2018 health insurance premiums (all 12 months) in 2017, can I take the deduction on 2017 taxes?

Possibly.  Here is what IRS Publication 538 says about the deductibility of prepaid expenses:

"Expense paid in advance. An expense you pay in advance is deductible only in the year to which it applies, unless the expense qualifies for the 12-month rule. Under the 12-month rule, a taxpayer is not required to capitalize amounts paid to create certain rights or benefits for the taxpayer that do not extend beyond the earlier of the following. 

(1)12 months after the right or benefit begins, or

(2) The end of the tax year after the tax year in which payment is made.

If you have not been applying the general rule (an expense paid in advance is deductible only in the year to which it applies) and/or the 12-month rule to the expenses you paid in advance, you must obtain approval from the IRS before using the general rule and/or the 12-month rule."

So as long as your medical insurance prepayment is for not more than one year, it may be deductible in the year paid.

The last paragraph in the IRS information above means that if you paid any expenses in the past for a future year and did not elect to deduct them in the year paid under the 12-month rule, then you cannot apply the 12-month rule this year without getting prior approval from the IRS.  However, if you never before paid any such expenses in advance, then no prior approval is required as you are making an initial election to use the 12-month rule.

Note however that this election does not just apply to medical insurance premiums, but to any prepaid item.  So if you paid some other item in advance six years ago and did not elect the 12-month rule for that item, you cannot use the 12-month rule for this year's medical insurance premiums without applying for an accounting change through the IRS.  You may have inadvertently done something without even realizing you did it.  For example, paying your share of next year's property tax when you sold your home and taking the deduction in the year paid.  This effectively elects the 12-month rule without making an overt election.  Or not taking that same deduction until the next tax year, which effectively elects the general rule to the exclusion of the 12-month rule.

If the amount involved is significant, I would suggest you contact a qualified tax consultant to look at your specific situation.

As a cash-basis S corp, If I pay my entire 2018 health insurance premiums (all 12 months) in 2017, can I take the deduction on 2017 taxes?

Just remember that if the S-corporation pays for 12 months of insurance for a shareholder, that amount for 12 months is also added to Box 1 of the shareholder's W-2 for 2017.

As a cash-basis S corp, If I pay my entire 2018 health insurance premiums (all 12 months) in 2017, can I take the deduction on 2017 taxes?

Good reminder!
harvey7
Returning Member

As a cash-basis S corp, If I pay my entire 2018 health insurance premiums (all 12 months) in 2017, can I take the deduction on 2017 taxes?

oh my, so if i use the 12-month rule for my cell phone bill i must "keep doing it' or else request permission? how is permission requested? yikes

As a cash-basis S corp, If I pay my entire 2018 health insurance premiums (all 12 months) in 2017, can I take the deduction on 2017 taxes?

You request a change in accounting method from the IRS using Form 3115:

<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/f3115.pdf">https://www.irs.gov/pub/irs-pdf/f3115.pdf</a>

Aren't you glad you asked?

As a cash-basis S corp, If I pay my entire 2018 health insurance premiums (all 12 months) in 2017, can I take the deduction on 2017 taxes?

@harvey7   One event of paying 12 months at time does NOT mean you need to keep paying 12 months at a time.  It just means that if you were doing it wrong or differently before, you need to file Form 3115.

For example, let's say you paid for 12 months of service in December 2016, and you only took December's amount in 2016, and then took the other 11 months in 2017.  That let's say you decided to pay 12 months of service in 2017 (that is optional, not mandatory).  If you do that, you NEED to only take the 1 month in 2017, and the other 11 months in 2018.  You can not use the 12-month-rule to take it all in 2017 unless you file Form 3115, because that is a 'change' from the method you used before.
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