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Fishermen's Health Insurance Deductible

Self-employed individuals with a net profit reported on Schedule C, C-EZ, or F; partners with net earnings from self-employment reported on Schedule K-1 of Form 1065; and shareholder's owning more than 2% of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2, may be eligible to deduct the amount paid for medical insurance and qualified long-term care insurance for themselves, their spouse, and their dependents. The insurance plan must be established under the business. If the premiums are paid by the S corporation, they must be included in the individual's gross income.

If you are eligible to participate in any employer subsidized health plan (including your spouse's) at any time during any month, you do not qualify for the self-employed health insurance deduction during that month. This rule is applied separately to plans that provide long-term care insurance and plans that do not provide long-term care insurance. For example, if you participate in your spouse's employer provided health plan which does not offer long-term care insurance, any premiums you pay for long-term care insurance which is established under your business, are deductible subject to the appropriate limitations. Self-employed fishermen who have net income from their fishing activity qualify for this deduction. Crewmembers who receive a percentage of the catch also qualify for this deduction since they are considered self-employed for this purpose under Internal Revenue Code Section 401(c).

If the fisherman has more than one health plan established under different businesses, a special computation is required. (See Publication 535, Business Expenses for details.) No deduction is allowed for self-insurance reserve funds.

Schedule C

Fishermen who are sole proprietors and file a Schedule C (Form 1040), Profit or Loss from Business or Schedule C-EZ (Form 1040), Net Profit from Business, to report their fishing activity, should not deduct their health insurance premiums on their Schedule C. The premium is deductible as an adjustment to income on page 1 of the Form 1040, U.S. Individual Income Tax Return. The deduction is also limited by the positive net income from the Schedule C. (If the taxpayer is eligible to participate in any employer subsidized health plan (including their spouse's), at any time during any month, they do not qualify for the health insurance deduction during that month.)

An exception to this is if the owner's spouse is a bona fide employee of the business operation and that spouse qualifies as an employee participant in a health insurance plan offered to all employees of the Schedule C. The spouse must not be considered an owner of the Schedule C business operation in order to qualify as an employee. If assets, bank accounts, loans, supplier accounts, and other business activity are in the name of the owner and the spouse, then the spouse would be considered an owner of the Schedule C business operation. If the spouse's only involvement in the business operation is as an employee being paid for doing a specific job such as bookkeeper, then the spouse would qualify as an employee. As a qualified participant, the health insurance policy may be in the spouse's name and the premium would qualify for a full deduction as a business expense as would any other qualified employee's policy cost. If the fisherman/owner is not covered under the spouse's policy but is listed under separate policy, then the fisherman/owner's premium would not be deductible on the Schedule C but would qualify for deduction under the adjustments to income part of the tax return based on the appropriate percentage and positive net income from the Schedule C.

(NOTE: Community property states may deem the spouse to be a 50% owner even if the business assets and accounts are solely in the owner's name. This would classify the spouse as an owner which would disqualify the spouse for treatment as a qualified employee for the health insurance purposes.)

For additional information regarding the Self-Employed Health Insurance deduction for partnerships, refer to Publication 541, Partnerships and Publication 535, Business Expenses, for S corporations.

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Page Last Reviewed or Updated: 04-Mar-2014