Health insurance premiums - Can I include as deduction in Self Employment Income for the months that I wasn't working?

[user82936234]

I have tried to find the answer to this but all articles only refer to the fact that you can't include premiums for months where you were eligible for coverage by you or your spouse employer.  

What I am trying to understand is whether or not I can include the health insurance premiums for the months of the year PRIOR to starting my self employment business. 

Here is the specific scenario I am trying to understand:

1.) Laid off in February 2021.

2.) No employer, not eligible for health insurance by employer. Purchase health insurance directly through carrier (e.g. Blueshield / Kaiser). Paid health insurance premiums for myself and family during months of April, May, June, July, Aug. 

3.) Started self employment business in September of 2021 and continue through December 2021. 

So in TurboTax in the Income & Expenses -> Self Employment Income & Expenses -> "Line of work" -> Expenses section. I am trying to include the health Insurance premiums. 

But I'm just not sure if I'm eligible to include the health insurance premiums I incurred during the months of April to August, because at that point in time, I was simply unemployed and looking for work. I had not yet started taking on clients and earning self employment income. Does this matter? Can I include the health insurance premiums or not? e.g. If the answer is no, I guess I can only include premiums that were paid between Sep and December (as those were the months I was earning income and self employed)?

[user82936234]

The page in Turbotax where it asks the question to provide your Health Insurance Premiums states the below text. It's not clear and does not mention if the months have to be during the months you had self employment income or not. It just asks to include the premiums you paid in 2021.

Here is the exact text:

Tell us about health insurance premiums for your IT support services work

Review the amount you previously entered for health insurance premiums you paid for yourself, your spouse, and your dependents (under age 27) in 2021. Make any necessary changes if the amount isn’t correct.
Be sure to not include premiums you paid for your employees or premiums paid through Healthcare.gov or your state marketplace.

[user82936234]

I came across publication 535 - Business Expenses. It mentions the rules around expensing health insurance premiums but I could not confirm whether it matters WHEN the premiums occurred. Everything I have found so far only talks about eligibility in relation to 1.) whether your business had a profit and 2.) that you did not qualify for health insurance from your employer or spouses employer. 

I meet the requirements, but what I'm not sure about, is that these health insurance premiums and service were provided during the months PRIOR to start my self employment work and therefore I'm not sure if I am able to include it as a business expense. 

I'd greatly appreciate the help to confirm whether this qualifies or not (and where I can confirm it in the IRS material). Thanks!

@Opus 17 - You have been a godsend on other very odd/complex situations, any chance you are familiar with this one?

[DMarkM1 · Accepted solution]

You are correct.  The insurance premiums allocable to the time prior to business start are not business expenses.  Here is an IRS link which list eligible start up costs.  Additionally, in Publication 535, under the topic "When to deduct premiums" and "Prepayments" it states, "You can't deduct expenses in advance, even if you pay them in advance."

[Opus 17]

@user82936234 

The only thing I have to add to @DMarkM1 ‘s excellent answer is that you may deduct health insurance premiums as a self-employment expense when your self-employment business is active, which is not necessarily when you receive your first client payment.

For example, if you are a graphic designer, you may be engaged in “ongoing and regular” business activities once you start advertising your services and bidding for jobs, even if you don’t get paid until the completion of your first job.

[user82936234]

Thank you @DMarkM1 and @Opus 17 !

I searched high and low and could not find it. I was skimming that part of the P353, but that makes sense. Logically it didn't make sense that it would be allowed prior to the start of the business. 

And thank you @Opus 17, I appreciate that additional comment. In fact, it was also something I was trying to determined (whether it was active or having income). I didn't register the DBA until later in the year, but I was operating under my name and building out my professional website and conducted networking activities and pursuing leads. It wasn't until later in the year that I landed a large client that I have been working with ever since. So technically the business was active, but I wasn't sure if it mattered if there was income or not.

I know that one of the requirements to be eligible is that the business has to have a net profit, so I thought perhaps it was also tied to whether or not income considered it active. 

So to summarize, I was laid off in February. I started advertising my professional services immediately thereafter. For the next few months I was creating a professional services website to advertise my services (building out my online portfolio, etc.). I also have a few pursuits that fell through during this time and then eventually around August I closed a deal which kicked off in September. 

So given this, during the months of April to August, it would be considered an active business, but I was not profitable until October of 2021. Therefore, based on the definition of "Active", I assume I can in fact claim these health insurance premiums. And in fact, I think that also means I should be eligible to also include the home office sq footage expenses for the months of April to August (currently I have only listed the months I was a receiving income from my client). 

Does that sound right to you @Opus 17 . Thanks again, I always appreciate your very insightful comments!

[JulieS]

Yes, you can deduct your business expenses and health insurance from the time your business became active.

Active business, refers to whether or not you, or your employees, partners, etc. are engaged in an effort to produce income. Failure to produce income doesn't change that. 

Your self-employed health insurance deduction is limited to the amount of your net income from the business, but that limitation applies for the year as a whole, not month to month. 

[user82936234]

Thank you @JulieS ! I greatly appreciate the input and clarification. Super helpful. 

I appreciate everyone's input on this so close to crunch time. Thanks again!