Self-Employed Health Insurance Deduction and QBI Impact for Partnerships - Any Solutions?

The software is likely doing this because of how the deduction needs to be handled technically. For partnerships, health insurance paid as guaranteed payments is indeed deducted at the partnership level, reducing the QBI. However, the self-employed health insurance deduction on the personal return is a separate calculation. The key is that while the guaranteed payment reduces your QBI basis, you're also entitled to the self-employed health insurance deduction on your personal return. The software is correctly backing it out of QBI again because self-employed health insurance is specifically excluded from QBI calculations at the individual level. Think of it this way: the guaranteed payment reduces partnership income (and thus QBI), but then on your personal return, the insurance portion needs to be identified separately to get the right AGI calculation. It's not double-dipping the deduction - it's making sure the amounts flow to the correct places on your personal return.

After spending hours on this exact same issue last tax season, I finally discovered taxr.ai (https://taxr.ai) which saved me countless headaches with partnership QBI calculations. I was pulling my hair out trying to figure out if our software was handling the health insurance deduction correctly for our 12 partners. The tool analyzed our partnership returns and confirmed exactly where the double-counting was happening. The really helpful part was that it explained exactly which line items were causing the issue and gave me specific override instructions for our software. I was able to fix all our returns in about an hour instead of the full day I had planned.

Just wanted to follow up - I tried taxr.ai after asking about it and WOW. I uploaded our partnership docs (we have 3 tiered partnerships with different insurance arrangements) and within minutes it flagged exactly where our software was double-counting health insurance deductions for QBI purposes. The PDF report it generated was so clear that I could show it to our managing partner to justify the software overrides. We even discovered that we had been handling QBI incorrectly for two partners last year who had both partnership and S-corp income. Definitely checking this tool out again next filing season!

Has anyone tried calling the IRS for clarification on this? I tried for THREE DAYS and couldn't get through. Then I found this service called Claimyr (https://claimyr.com) and they got me connected to an actual IRS agent in about 20 minutes. I was shocked since I had spent hours on hold before. They have a demo video showing how it works: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed that for partnerships, health insurance paid as guaranteed payments DOES reduce QBI at the partnership level, and then the self-employed health insurance deduction on the individual return also impacts QBI. So the software is likely handling it correctly in backing it out twice.

I have to eat my words about Claimyr. After posting that skeptical comment, I decided to try it myself because I was desperate to get an answer about a similar QBI issue with guaranteed payments. Not only did I get through to the IRS in about 30 minutes, but the agent was able to pull up the relevant section in their internal guidance. They confirmed what others have said - the health insurance as a guaranteed payment DOES reduce QBI at the partnership level, AND it's also excluded again at the individual level per the QBI regulations. So yes, the software is handling it correctly. Still frustrating that it feels like double-counting, but at least now I know for sure instead of guessing.

I attended a tax update webinar last week where they specifically addressed this issue. The presenter (who used to work for the IRS) was very clear that the health insurance paid as guaranteed payments reduces QBI at the partnership level, AND it's properly excluded again on the individual return. The difference with S corps is that the health insurance reimbursement should be included in box 1 of the W-2 but NOT in boxes 3 and 5 (for social security and Medicare wages). This treatment makes it clear that it's not really "wages" for all purposes. Whereas guaranteed payments are explicitly defined as reducing QBI in the regulations.

This might be a silly question but does anyone know if this same issue applies to single-member LLCs? My tax software seems to be handling health insurance differently than when I was a partnership and I can't figure out why.

Thanks everyone for the detailed explanations! This has been incredibly helpful. I was getting so frustrated thinking the software was malfunctioning, but now I understand that the partnership treatment really is different from S corps. @Omar Fawaz your explanation about the regulations specifically defining guaranteed payments as reducing QBI makes it click for me. I was thinking about it purely from an economic perspective, but the tax law draws these distinctions for a reason. I'm going to trust the software and stop trying to override it. Better to follow the regulations correctly than to second-guess based on what "feels" right. Appreciate everyone sharing their experiences - this community is invaluable for working through these complex issues!

I've been dealing with this exact same issue at our firm! What helped me understand it was realizing that partnerships and S-corps have fundamentally different tax structures, even when the economic substance looks identical. For partnerships, the guaranteed payment for health insurance is treated as a distribution that reduces the partnership's ordinary business income before it even gets to QBI calculations. Then on your personal return, you get the self-employed health insurance deduction, which further reduces your AGI but doesn't affect QBI since it's specifically excluded. The S-corp situation was genuinely a software error because health insurance reimbursements shouldn't reduce QBI twice - they're included in W-2 wages but aren't really "business expenses" in the same way guaranteed payments are. I know it feels wrong, but the software is actually handling partnerships correctly. The real frustration is that Congress didn't design 199A with consistency across entity types in mind!

This whole discussion has been eye-opening! I've been dealing with similar frustrations in our small CPA firm partnership, and I was convinced our software was malfunctioning too. What really helped me understand this was looking at the actual 199A regulations - guaranteed payments are explicitly excluded from QBI at the partnership level per Reg. 1.199A-3(b)(2)(ii)(A). Then the self-employed health insurance deduction on your personal return is separately excluded from QBI per Reg. 1.199A-1(c)(3)(i). So while it feels like double-counting, the regulations are actually requiring this treatment. The partnership level reduction happens because guaranteed payments reduce ordinary business income before QBI is calculated, and the individual level exclusion happens because self-employed health insurance is specifically carved out of QBI. I ended up calling our software vendor to confirm they were following the regs correctly, and they walked me through exactly how they implement these provisions. Sometimes you just have to trust that the regulations are more complex than the economic reality!

This has been such a helpful thread! I'm dealing with a similar situation at our accounting firm and was also questioning whether our software was handling the health insurance deduction correctly for partnerships. What really helped me understand this was realizing that the "double reduction" isn't actually double-dipping - it's two separate regulatory requirements working together. The guaranteed payment reduces QBI at the partnership level because it reduces ordinary business income before QBI is even calculated. Then the self-employed health insurance deduction on the individual return is separately excluded from QBI because the regulations specifically carve it out. I think the confusion comes from comparing it to the S-corp treatment, but as others have pointed out, the fundamental tax structures are different even when the economic result looks the same. Guaranteed payments have a specific definition and treatment under the partnership rules that's distinct from how S-corp health insurance reimbursements work. Thanks to everyone who shared the regulation citations and explanations - it's given me confidence to trust our software rather than trying to override what initially seemed like an error. Sometimes tax law really is more complex than the underlying business transaction!

As someone who's been wrestling with partnership QBI calculations for years, this thread perfectly captures the frustration so many of us feel with these rules! The distinction between economic substance and tax treatment is something that trips up even seasoned practitioners. What I've found helpful is explaining it to clients this way: think of guaranteed payments as the partnership "buying" services from you (including health insurance coverage), which reduces the partnership's income before QBI is even in the picture. Then on your personal return, you're getting a separate deduction for self-employed health insurance that has its own QBI exclusion rules. The S-corp comparison that started this discussion is really insightful - it shows how Congress created different rules for economically similar transactions depending on entity type. The S-corp health insurance fix was correcting an actual error in how software interpreted the regs, while the partnership treatment is working as (unfortunately) intended. One thing I'd add for anyone still struggling with this: consider running the calculation both ways on a test return to see the actual dollar impact. Often the "double reduction" feeling is worse than the actual tax difference, which can help you feel more confident about following the regs as written.