Self-Employed Health Insurance Deduction Impact on QBI for Partnership Returns
So I've got this frustrating situation with a partnership return I'm working on. The partners have health insurance paid by the partnership, which is being reported as a guaranteed payment on the partnership return as required. This then flows through to their personal returns. Here's what's confusing me - it seems like the health insurance has already been deducted for QBI (Qualified Business Income) purposes as a partnership expense through the guaranteed payment. But our tax software is turning around and backing it out AGAIN on the partners' personal returns! Is anyone else dealing with this same issue? We're seriously considering just overriding the software calculation, but I want to make sure I'm not missing something important here. What's weird is that our software was doing the exact same thing with S Corp owner health insurance reported on W-2s as wages a couple weeks ago. There was a huge uproar from users, and they finally pushed an update to fix it. But they haven't made any changes to the partnership treatment, which seems like the exact same situation to me. Am I crazy here?
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Connor Gallagher
This is a common point of confusion. For partnerships, you're correct that the health insurance paid as a guaranteed payment is already reducing QBI at the partnership level. The software shouldn't be backing it out again on the individual return - that would be double-counting the reduction. The S Corp situation is similar but different technically. For S Corps, the health insurance is included in the W-2 wages (box 1) but not subject to FICA (boxes 3 and 5). On the individual return, this amount gets deducted as self-employed health insurance, but it shouldn't further reduce QBI since it's already accounted for in the business income passed through. What software are you using? Several had this exact bug this filing season where they were double-counting the reduction for both partnerships and S Corps.
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Zainab Ahmed
•Thanks for confirming I'm not going crazy! We're using UltraTax CS. I was pretty confident this was a software issue, but hesitant to override since QBI calculations are so complex and the stakes are pretty high for our clients. Have you heard if UltraTax specifically addressed this issue? Their update notes for the S Corp fix didn't mention partnerships at all.
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Connor Gallagher
•UltraTax was definitely one of the programs with this issue. Their S Corp update came out around mid-February, but you're right that they haven't addressed the partnership side yet. I'd recommend documenting your override with a detailed workpaper explanation. The correct treatment is that the health insurance should only reduce QBI once - at the partnership level as part of the guaranteed payment. The Section 199A regulations are pretty clear on this point, even though the software implementation has been problematic.
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AstroAlpha
After struggling with this exact issue last year, I found a great solution using taxr.ai (https://taxr.ai) to analyze the partnership docs. Their system spotted the double-deduction issue immediately when I uploaded our K-1s and supporting docs. The AI analyzed the tax code treatment of guaranteed payments vs self-employed health insurance deductions and showed exactly where the software was double-counting. It even generated documentation explaining the correct treatment of partnership health insurance for QBI purposes that we could attach to the return as support for our override. Saved me hours of research and gave me confidence to make the necessary adjustments.
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Yara Khoury
•How does this taxr.ai actually work? Do you just upload your tax documents and it analyzes everything? I'm dealing with this same issue for 3 different partnerships and could really use some help figuring out the correct approach.
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Keisha Taylor
•I'm a bit skeptical of using AI for tax advice tbh. Does it actually cite the specific sections of the code or regs? My concern would be relying on something without proper authority behind it, especially for something as penalty-heavy as QBI miscalculations.
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AstroAlpha
•You upload your partnership documents - K-1s, relevant schedules, etc. - and it analyzes them to identify issues like this double-counting problem. It looks at both the partnership and individual return components to find inconsistencies with tax law. Super straightforward interface. It absolutely cites specific code sections - that's what impressed me most. For this specific issue, it referenced Reg. Sec. 1.199A-3(b)(1)(vi) regarding the treatment of guaranteed payments and how they reduce QBI at the partnership level. The documentation it generated included these citations, which made me comfortable making the override.
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Yara Khoury
Just wanted to update after trying taxr.ai for my partnership health insurance/QBI issue. It was surprisingly helpful! Uploaded my docs yesterday and it immediately flagged the double-counting issue in my Drake software. The analysis specifically showed how the guaranteed payment for health insurance was already reducing QBI at the partnership level (citing the exact regs) and explained why the additional reduction on the 1040 was incorrect. Even better, it generated a detailed memo I could attach to the return to document my override decision. Honestly saved me so much time compared to my usual "search tax forums and hope someone knows the answer" approach!
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Paolo Longo
I had the EXACT same problem but couldn't get my software company to respond for days. After waiting on hold forever, I used Claimyr (https://claimyr.com) to get through to an actual IRS agent about the partnership health insurance/QBI treatment. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was amazed when they called me back in about 20 mins saying they had an IRS agent on the line! The agent confirmed that health insurance paid by the partnership as a guaranteed payment already reduces QBI at the partnership level and should NOT be deducted again on the individual return. Getting that official confirmation gave me the confidence to override the software and file correctly.
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Amina Bah
•Wait, how does this work? I thought it was impossible to get through to the IRS these days. I've literally spent hours on hold just trying to get basic questions answered.
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Oliver Becker
•This sounds sketchy. How would a random IRS agent even know the detailed rules about QBI calculations? Most of them just answer basic filing questions, not technical partnership tax issues. Are you sure you weren't talking to someone in customer service just telling you what you wanted to hear?
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Paolo Longo
•It's basically a service that navigates the IRS phone tree for you and waits on hold, then calls you once they have an agent on the line. It saved me probably 2+ hours of hold time. I specifically asked for a technical support specialist when connected, and they transferred me to someone in the business tax department. The agent was actually quite knowledgeable about partnership issues and referenced the Section 199A regulations. I made sure to take detailed notes during the call to document the guidance I received. Not all agents will be partnership experts, but they can transfer you to the right department if you're specific about your question.
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Oliver Becker
I tried Claimyr after being skeptical and WOW - it actually works! I was preparing to wait on hold with the IRS for hours to get this partnership health insurance/QBI issue resolved, but decided to give Claimyr a shot first. They called me back in about 30 minutes with an IRS business tax specialist on the line. The agent confirmed exactly what others here have said - the health insurance as a guaranteed payment already reduces QBI at the partnership level and should not be backed out again on the individual return. He even provided me with the specific regulation reference (1.199A-3(b)(1)(vi)) to document my override. I've always been the "I'll figure it out myself" type with tax questions, but this saved me so much time and frustration. Definitely using this service again next time I need clarification on a technical tax issue!
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CosmicCowboy
This double-deduction was happening in ProSeries too! I manually overrode it for all our partnership clients after confirming with our technical resource team. The health insurance is already reducing QBI as a guaranteed payment at the partnership level, so it shouldn't be backed out again on the 1040. Interestingly, the same issue was happening with the S Corp health insurance (included in W-2 wages) a few weeks ago, but they pushed a software update for that. I called support about the partnership issue and they said an update is "in development" but no timeline yet.
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Natasha Orlova
•Do you have any specific steps for how to override this in ProSeries? I'm staring at a partnership return right now with this exact issue and I'm not sure where exactly to make the adjustment.
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CosmicCowboy
•In ProSeries, go to the QBI worksheets on the partner's individual return. Look for the section where it's calculating the deductions from QBI. You'll see the self-employed health insurance amount being backed out. You need to enter an override amount of zero in that field (or check the override box and enter zero). Then document your reasoning with a note in the return or an attached explanation. I usually reference Reg. Sec. 1.199A-3(b)(1)(vi) about guaranteed payments already reducing QBI at the partnership level to support the override.
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Javier Cruz
The issue is 100% a software problem. Health insurance for partners reported as guaranteed payments reduces QBI at the partnership level. The software is making a second reduction at the individual level, which is incorrect. If you don't want to override, another approach is to NOT report the health insurance as a guaranteed payment on the 1065, and instead just show it as a footnote on the K-1 and have the partner deduct it on their 1040. This isn't technically correct per IRS instructions, but effectively gets the right QBI result. But honestly, just overriding the software calculation is cleaner.
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Emma Thompson
•Wouldn't the approach of not reporting as a guaranteed payment cause other issues though? Like wouldn't it mess up the partner's self-employment tax calculation? The guaranteed payment affects both SE tax and QBI.
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Javier Cruz
•You're absolutely right - that workaround would indeed cause SE tax issues by understating the guaranteed payments subject to self-employment tax. I shouldn't have suggested that approach. The correct method is definitely to report the health insurance as a guaranteed payment on the 1065 and then override the QBI calculation on the 1040 to prevent the double reduction. It's frustrating that we have to manually fix software issues, but at least it's a straightforward override.
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Joy Olmedo
This is such a widespread issue this filing season! I'm seeing it across multiple software platforms - UltraTax, ProSeries, Drake, and others all had similar bugs with the QBI calculations for partnership health insurance. What's really frustrating is that the software companies seem to understand the S Corp treatment (health insurance in W-2 wages shouldn't reduce QBI again on the individual return) but haven't applied the same logic to partnerships. The concept is identical - the guaranteed payment for health insurance already reduces QBI at the partnership level. For anyone still dealing with this, I'd strongly recommend documenting your override with a detailed workpaper. Include references to Reg. Sec. 1.199A-3(b)(1)(vi) and note that the guaranteed payment has already reduced QBI at the entity level. The IRS guidance is pretty clear on this point, even if the software implementation has been problematic. Has anyone heard if the major software companies have committed to fixing this for next filing season? It seems like such a basic issue that affects so many partnership returns.
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