S Corporation and Partnership Fringe Benefits

By Biebl, Andrew R. | Journal of Accountancy, July 1991 | Go to article overview

S Corporation and Partnership Fringe Benefits


Biebl, Andrew R., Journal of Accountancy


In revenue ruling 91-26, the Internal Revenue Service changed the way to report medical insurance premiums paid by a partnership on behalf of a partner or paid by an S corporation on behalf of a morethan-2% shareholder (IRB no. 1991-15, 3/26/91).

The new ruling, which applies to tax years ending after 1990, holds that the partnership or S corporation should deduct fringe benefits. For a partnership, such fringe benefits are to be treated as guaranteed payments; an S corporation is to deduct fringes as wage expenses. This approach, of course, ensures the cost of the fringe benefit paid by the entity is exposed to the Social Security tax.

The ruling provides an option for partnerships (but not for S corporations): The entity may account for such a fringe benefit as a reduction in distributions to that partner. Under this approach, the cost of the fringe benefit is not deductible by the partnership. In all circumstances, the individual partner or shareholder still has the ability to claim offsetting deductions on his or her form 1040to the extent the fringe represents an item, such as medical insurance, which is eligible for the 25% self employed deduction or itemized deduction treatment. …

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