Section 199A Self-Employed Health Insurance

The final regulations 1.199A for the Section 199A deduction clarified all kinds of things and the handling of the deductible portion of self-employment tax, self-employed health insurance and retirement plans for small business owners is one of them. Here is the code from 1.199A-3(b)(1)(vi)–

(vi) Other deductions. Generally, deductions attributable to a trade or business are taken into account for purposes of computing QBI to the extent that the requirements of section 199A and this section are otherwise satisfied. For purposes of section 199A only, deductions such as the deductible portion of the tax on self- employment income under section 164(f), the self-employed health insurance deduction under section 162(l), and the deduction for contributions to qualified retirement plans under section 404 are considered attributable to a trade or business to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis to the gross income received from the trade or business.

Here is the key phrase- “For purposes of section 199A only, deductions … are considered attributable to a trade or business” and therefore reduce the qualified net business income for the calculation of the Section 199A. In other words, you would not have these expenses if you otherwise did not have a small business. Sure, you pay Social Security and Medicare taxes, pay health insurance premiums and contribute to a 401k plan with your W-2 job, but those “expenses” are attributed to your employment; same concept here.

What does all this mean? Before we get into that, the last sentence is crazy lawyer talk- “to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis to the gross income received from the trade or business.” We’ll speculate on what this tidbit means since guidance specific to this phrase is not available or at least cannot found in our research databases (Thomson Reuters and Bloomberg).