Medical Loss Ratio Rebate for Sole Proprietor

[DeeStall]

Received a Medical Loss Ratio Rebate check on September 2, 2022 from Healthkeepers, Inc for 2021.  I file as a sole proprietor and claimed the health insurance payments as a business deduction for 2021.  How do I enter this rebate on my 2022 tax return, as personal or business income?  And where do I enter it?

[MarilynG1]

You could enter it as Miscellaneous Business Income and indicate that it was a health insurance premium rebate, since you did deduct the premiums you paid.

[DeeStall]

Thank you.  

I also have a question regarding dental insurance bought through the marketplace.  Can I deduct the monthly premium costs under schedule c health insurance premiums?  I did not get a 1099a from healthkeepers because this is considered a stand alone policy.

[CatinaT1]

Maybe. Were either you or your spouse eligible to participate in an employer-subsidized health plan?

If not, you are eligible to take the Self Employed Health Insurance deduction for dental insurance premiums paid out of pocket.

You can find more information here: Deducting Health Insurance Premiums If You're Self-Employed

[DeeStall]

Thank you for your quick response.  

[bambid4]

If you report this as business income you will end up paying Self-Employment taxes on it when the deduction of the health insurance premium did not originally affect what was paid for Self-Employment taxes in the year it was deducted.  Seems like it is more appropriate to list as misc income on Schedule 1 (line 8). OR should it reduce the amount of SE Health Insurance deduction the year it was received (Sched 1 line 17)? 

[DianeW777]

A recovery of an amount that is received in a year after it was used as a deduction is income in the year received.  You cannot amend your tax return for the earlier year.

As indicated by @marilynjoy the income should be reported on the form or schedule where the deduction was used.  Since this was used to reduce the business income in the year paid, then for this reason, it would be an increase to business income in the year of the recovery.  This is called the Tax Benefit Rule.

• Tax benefit rule. You must include a recovery in your income in the year you receive it up to the amount by which the deduction or credit you took for the recovered amount reduced your tax in the earlier year. For this purpose, any increase to an amount carried over to the current year that resulted from the deduction or credit is considered to have reduced your tax in the earlier year.

Likewise for self employment business activities the instruction is as follows.

• Recovery of items previously deducted. If you recover a bad debt or any other item deducted in a previous year, include the recovery in income on Schedule C. However, if all or part of the deduction in earlier years did not reduce your tax, you can exclude the part that did not reduce your tax. If you exclude part of the recovery from income, you must include with your return a computation showing how you figured the exclusion.  IRS Publication 334, page 24

The key is whether the deduction in the original year reduced your tax (personal income tax and self employment tax). Check the tax with and without the deduction of the amount recovered to see what amount must be included in income in the year of recovery (2022).  If you know the full amount reduced your tax then the full amount is included as Schedule C income.

@DeeStall

[bambid4]

The Self-employed Health Insurance Deduction is on Schedule 1 - it is NOT on Schedule C. So to report a rebate as income on Schedule C is not reporting it where it was first deducted.  You should not have to include it on Schedule SE as income because it was never a business deduction for Sch SE. 

SE Health Insurance is an adjustment to business income for Qualified Business Deduction (Form 8995).  Should you include the rebate as an adjustment to income for QBI in the year it was received if it reduced your income for QBI the previous year?

[GeorgeM777]

Yes, it does get reported as an adjustment to income on Schedule 1.   IRS Publication 525 indicates that the recovery discussed in the prior posts gets reported on Line 8z of Schedule 1.  

@bambid4