Working in the tax and finance space, I’ve noticed a recurring theme. People tend to put trust in the fact that because they ‘can’ do something, it is allowed. Some examples:
S Corp Self Employed Health Insurance
A self employed person who operates an S Corp deducts their health insurance. Tax software allows you to do it, but tax law does not. Here’s the IRS Guidance on the topic. In short, you need to run the payments through on your payroll, as an item that is subject to Federal and State income tax, but not FICA. If you do that, you can deduct it later on your tax return.
HSA Direct Funding
HSA’s can be funded in excess of what the employer put in via your paycheck, up to the annual maximums. You can fund an entire year of HSA (Family max of $6750) with just December coverage if you qualify for the ‘Last Month Rule‘. However, The HSA funding platform doesn’t if you qualify for this or not, or even if you still have a High Deductible Health Plan.
Solo 401(k) Funding
401(k) can be funded up until tax deadlines, including extensions, and you can fund $18K in Employee Deferrals and up to $35K (2016) or $36K (2017) in Employer Contributions. The 401(k) platform doesn’t know if you earned enough to fund $35K for last year, it just accepts up to that amount.
Deducting an expense which is a capital transaction. The business owner may think something is a business expense, but in reality, it is a capital investment.
These disconnects cause a lot of problems for people. They require knowledge of the underlying rules of the transaction, not just the ability to find a willing 401(k) or HSA provider to accept the money, or tax software or tax professional who will report the transaction.
So, when dealing with financial stuff, don’t forget… just because you ‘CAN’ do something doesn’t mean that you’re allowed to.