Questions and Answers from NSA’s Tax Help Desk

A question that the NSA Tax Help Desk seems to answer almost daily, or at least it feels like it…is:

Q: Can an S-Corp shareholder reimburse, himself or herself for health insurance premiums paid personally and still obtain the benefits of the self-employed health insurance deduction under IRC Sec 162(l) on the front page of their individual Form 1040?

A: Yes, as long as the shareholder is the only employee of his or her S-Corporation. If he or she has even one other employee, including a spouse, then the “reimbursement” plan will be a problem.

The whole issue is a result of provisions within the Affordable Care Act (ACA) and the IRS guidelines that were issue under IRS Notice 2013-54, but whose effects were postponed through the end of 2015. The relief from the penalties imposed under IRC Sec 4980D were granted under IRS Notice 2015-17, but only through the end of 2015.

Therefore, as of January 1st and until any extension is granted, if any, the S-Corp shareholder with at least one other employee, other than themselves, is no longer allow to “reimburse” themselves for health insurance premiums paid outside of the corporation.

This action, even if they were to include reimbursements for their employees too, would be in violation of an ACA provision that could result in the assessment of the $100/day per employee penalty under IRC Sec 4980D.

Q: Another common question in the last couple of months involves corporate liquidations – either C-Corp or S-Corp and the distribution of assets in liquidation of a shareholders’ interest or stock in the entity. Is this a taxable event and if so how is it taxed??

A: The distribution of any appreciated asset out of a C-Corp or an S-Corp, either in liquidation or not, is a taxable event to the corporate entity. The corporation is required to treat the distributed asset as if it were sold to the shareholder at its fair market value (FMV). Therefore the corporation must recognize a gain on the difference between this FMV and the assets cost basis, less depreciation, if any. This “deemed” sale is reported on the corporations’ Form 4797.

The provisions of this rule are governed under IRC Sec 311(b) and additionally with S-Corps under IRC Sec 1371.

Unfortunately, this is just the first part of a two (2) part taxable event. The “fair market value” (FMV) of the distributed assets also has to be treated as proceeds in liquidation, reported on the Form 1099-DIV, in Box 9 – and will be a part of the shareholders’ liquidating gain/loss on Schedule D of their Form 1040. The FMV of any asset, plus any cash distributed in liquidation is compared to the shareholders’ basis in their stock for purposes of this gain/loss.

If the distributed asset is not part of a liquidation then it would need to be accounted for by the shareholder as either compensation, a loan or loan repayment, or potentially a distribution against basis, if the entity is an S-Corp with a positive balance in the corporate “accumulated adjustments account” (AAA).

With the “information return” season in full swing, the NSA Tax Help Desk gets Form 1099 issue questions this time of the year.

Q: Does a taxpayer, in the course of their trade or business, have to issue a Form 1099-MISC to a supplier or contractor if they pay that person via credit card, debit card or pay pal? Again, we are assuming that the payment exceeds $600 and it not being paid to a “corporate” entity.

A: Apparently not! Whereas, the general rule under IRC Sec 6041(a) and Sec 6041A(a) which requires the issuance of the Form 1099-MISC when a payment is made that meets the requirements of those two (2) code sections, is overridden or replaced by the Form 1099-K and IRC Sec 6050W – when those payments are made via a credit card, debit card or thru PayPal.

The fairly recent introduction of the Form 1099-K and the common use of third-party payment networks like Pay Pal have shifted the reporting requirements from the “business owner” to these payment organization and/or the credit card companies.

So the bottom line is… if you pay your independent contractor or supplier via Pay Pal or with your credit or debit card, you no longer are required to issue them a Form 1099-MISC – per IRS Reg. 1.6041-1(a)(1)(iv). This responsibility now becomes that of this third-party organization and the Form 1099-K.