Can I deduct dental insurance costs as a business expense on Sch. C (having sufficient income), even if I paid for those premiums via an HSA?

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I have an HSA funded some years ago and I use the remaining funds for medical expenses, including the costs of dental insurance. I also have a business for which I use Sch. C that has sufficient income to include the costs of medical insurance. However, since the dental insurance was paid via an HSA, I'm not sure if I can include the premium as a deduction on my Sch. C business expense.  My question is, can I do so? 

[DanielV01 · Accepted solution]

Yes, you can claim the deduction for your Schedule C.  What's actually not allowed is to pay the dental insurance premiums through your HSA.  Notice the following excerpt from the following link:  Qualified medical expenses.  (Click on link for additional information)

Insurance premiums. 

You can’t treat insurance premiums as qualified medical expenses unless the premiums are for:

1. Long-term care insurance.

2. Health care continuation coverage (such as coverage under COBRA).

3. Health care coverage while receiving unemployment compensation under federal or state law.

4. Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).

The premiums for long-term care insurance (item (1)) that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. See Limit on long-term care premiums you can deduct in the instructions for Schedule A (Form 1040).

Items (2) and (3) can be for your spouse or a dependent meeting the requirement for that type of coverage. For item (4), if you, the account beneficiary, are not 65 or older, Medicare premiums for coverage of your spouse or a dependent (who is 65 or older) generally aren’t qualified medical expenses.

Once you withdrew your funds from the HSA for this nonqualified distribution, it became taxable (which allows the deduction for your Schedule C).  Unfortunately, it is also subject to a 20% additional tax penalty.  To prevent this, what you can do is contact your Plan Administrator and return these funds as a mistaken distribution.  If you do so before April 17, 2018, you will avoid the penalty.  The insurance will have been paid for with taxable funds, and this will qualify for the deduction.

[dmertz]

The dental insurance expense cannot be deducted as a business expense on Schedule C;  only the business's expenses for health insurance for employees and not the sole-proprietor are deductible as business expenses on Schedule C.  Instead, the out-of-pocket cost of health insurance for the sole-proprietor is deductible on Form 1040 line 29.  Employee health insurance expenses are entered as Employee benefits while the sole-proprietor's health insurance is entered under Health insurance premiums.  Each is a separate section under Less common business expenses.