How to Report Partner Health Insurance on 1065
Understand the specific reporting method for partner health insurance that allows the partnership a deduction while enabling the partner's personal deduction.
A business partnership files Form 1065, U.S. Return of Partnership Income, to report its financial activity to the IRS. A common area of uncertainty is how to report health insurance premiums paid for partners. Since partners are not legally considered employees, the rules for these expenses differ from those for regular staff. The correct accounting method ensures the expense is properly deducted by the business while allowing the partner to claim a personal deduction.
Qualification Requirements for the Deduction
For a partner’s health insurance premiums to be deductible by the partnership, the insurance plan must be established in the name of the partnership. The policy itself can be held in the name of the partnership or the partner, but the plan must be established under the business.
There are two ways to handle the premium payments to meet this requirement. The partnership can pay the insurance provider directly, or it can reimburse a partner for the exact amount they paid for the premiums.
If these conditions are not met, such as a partner paying for a private policy with no partnership involvement, the payments are treated as a non-deductible distribution of partnership assets. This is similar to a cash draw and does not provide a deduction to the partnership.
Calculating the Guaranteed Payment Amount
Once the health insurance plan qualifies, the premiums paid by the partnership are treated as guaranteed payments. A guaranteed payment is made to a partner for services rendered and is calculated without regard to the partnership’s income for the year. This means the partner receives the payment whether the partnership is profitable or not, much like an employee’s salary.
The total guaranteed payment for health insurance is the sum of all premium payments made by the partnership for that partner during the tax year. For example, if the partnership pays a $500 monthly premium for a partner, the total guaranteed payment for the year would be $6,000. By treating the premiums as a guaranteed payment, the partnership can deduct the cost as a business expense.
Reporting on Form 1065 and Schedule K-1
After calculating the total guaranteed payment, the amounts must be reported on the partnership’s tax return. The process involves entries on Form 1065 and each partner’s Schedule K-1.
On Form 1065, the total amount of guaranteed payments for health insurance made to all partners is included on Page 1, Line 10, “Guaranteed payments to partners.” This entry allows the partnership to take a business deduction for the expense, reducing its ordinary business income.
The reporting continues on each partner’s Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.” The health insurance premium amount must be reported in two separate boxes for each partner. First, the amount is included in the total reported in Box 4a, “Guaranteed payments,” which ensures the partner includes the payment in their taxable income.
Concurrently, the same amount is reported in Box 13 of the Schedule K-1 with Code M. This code specifically designates “Amounts paid for medical insurance.” This informational reporting provides the specific figure the partner needs to claim a personal deduction on their own return.
How Partners Use the K-1 Information
The information on the Schedule K-1 is used by the partner when filing their personal income tax return, Form 1040. The partner takes the amount from Box 13 with Code M to claim the Self-Employed Health Insurance Deduction. This is taken as an “above-the-line” adjustment to income on Schedule 1 (Form 1040), which reduces their adjusted gross income (AGI).
A limitation applies to this deduction. The amount a partner can deduct for self-employed health insurance cannot exceed their net earnings from self-employment from that specific partnership. This includes the partner’s share of partnership income and any guaranteed payments. A partner also cannot claim the deduction for any month in which they were eligible to participate in a subsidized health plan offered by another employer, including that of a spouse.