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Howdy,

I've been advised by my CPA that my wife should own my S-corp, of which I am the only employee. He advised this so that we can deduct the costs of health insurance and educational reimbursement.

Is this cool? It seems to me that he IRS would still consider the health insurance benefits to be income to us, even though the employee receiving them is not a 2% owner.

Thanks,

Matt
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That may depend on where you are. Here, in Massachusetts, it doesn't seem to matter who is the nominal owner of the shares. A married couple effectively own the corporation jointly, regardless of who is on the paperwork. I am somewhat dubious of this, particularly if your wife participates in the health insurance.
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[[I've been advised by my CPA that my wife should own my S-corp, of which I am the only
employee. He advised this so that we can deduct the costs of health insurance and educational
reimbursement.

Is this cool? It seems to me that he IRS would still consider the health insurance benefits to be
income to us, even though the employee receiving them is not a 2% owner.]]

Sorry Matt...but this just won't work.

It works really well for a C corp, and even a sole proprietorship. But not with an S corp. In fact, from a benefits standpoint, S corps really STINK.

In applying the income tax rules of the Code relating to employee fringe benefits, an S corporation is treated as a partnership, and any person who is a more-than-2% shareholder is treated as a partner of the partnership. This is laid out in Code Sec. 1372(a).

For purposes of the above rule, fringe benefits include:

1. The exclusion from income of amounts received from an accident and health plan;

2. The exclusion from income of amounts paid by an employer to an accident and health plan;

3. The exclusion of the cost of up to $50,000 of group-term life insurance on an employee's life; and

4. The exclusion from income of meals and lodging furnished for the convenience of the employer.

It appears that Congress intended Code Sec. 1372(a) to apply to other similar fringe benefits, such as the exclusion of:

1. Accident or health insurance payments for personal injuries or sickness;

2. Employer-provided educational assistance;

3. Employer-provided dependent care assistance up to $5,000 annually;

4. Employer-provided no-additional cost services, employee discounts, working condition fringe benefits, and de minimis fringes; and

5. Cafeteria plan benefits.

So that's the bad news. And it just gets worse. A shareholder will be treated as owning more than 2% of an S corporation's stock for any taxable year in which that shareholder (after applying the constructive ownership rules of Code Sec. 318(a)) owns on any day during that taxable year either:

. . . more than 2% of the outstanding stock of the S corporation, or

. . . stock possessing more than 2% of the total combined voting power of all stock of the S corporation.

So your wife is the owner? The we would have to review the constructive ownership rules in Code Section 318(a) to find out if YOU also constructively own the shares, which would impact the fringe benefit issues. So lets do just that.

Code Sec. 318(a)(1)(A) says that an individual is considered as owning the stock owned, directly or indirectly, by or for his:

1. Spouse (unless legally separated under a decree of divorce or separate maintenance)(Code Sec. 318(a)(1)(A)(i));
2. Children,
3. Grandchildren, and
4. Parents (Code Sec. 318(a)(1)(A)(ii))

For purposes of the above rule, grandparents and brothers and sisters of an individual are not family members. But for purposes of the above rule, a legally adopted child of an individual is treated as the child of the individual by blood.

So, because of the constructive ownership rules found in Code Sec. 318(a), even if your wife owned the stock, YOU would be considered a more than 2% owner, and would be denied the fringe benefits identified above.

You might want to have your CPA review section 318(a) in order to pur his/her mind are rest on this issue.

TMF Taxes
Roy
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