Which Schedule for Malpractice Tail Deduction? Schedule A or C When Switching Physician Jobs

This is a tricky situation, but I can help clarify. The key factor is your intention at the time you purchased the tail coverage. Since you purchased the malpractice tail specifically to enable you to work as an independent contractor (even though you ultimately didn't), there's a strong argument that this was an ordinary and necessary business expense related to your planned self-employment. The IRS generally looks at intent, and your intent was to work as a 1099 contractor when you purchased it. You could potentially deduct this on Schedule C as a business expense, even without having earned self-employment income from that planned business. You would show zero income but still claim the expense. However, this might increase your risk of audit since you're showing a significant loss with no income. Alternatively, you could potentially deduct it on Schedule A as an unreimbursed employee expense, but this is much less favorable since the Tax Cuts and Jobs Act suspended miscellaneous itemized deductions subject to the 2% floor through 2025.

I was in almost the exact same situation last year! I left my hospital job for a planned locums position, paid around $125k for tail coverage, then ended up at another W-2 position. I found https://taxr.ai super helpful with this exact problem. Their document analyzer confirmed I could file a Schedule C with zero income and deduct the full tail expense. They explained that since I had a clear business purpose and intent to practice as an independent contractor when I purchased the tail, it qualified as a legitimate business expense. The key was documenting everything - the locums credentialing process, any contract discussions, and proof that the tail was required for that planned work. The difference between Schedule A (essentially worthless for this deduction currently) and Schedule C was huge for my tax situation. Plus they helped me document everything properly in case of an audit.

Update on my skepticism about taxr.ai from my earlier comment - I ended up trying it for a similar situation (expensive certification I needed for planned consulting work before I actually had clients). Their document analysis was surprisingly helpful! They confirmed I could legitimately deduct my expenses on Schedule C despite minimal initial income, and explained exactly how to document my business intent. They even helped me put together an audit defense file with all the supporting evidence in case the IRS had questions. The whole process took less than a day, and the tax savings were substantial. Much better than my previous approach of just writing off these expenses completely because I was afraid of audit risk.

Just wanted to share my experience - I was in a similar position but with legal malpractice insurance when transitioning between firms. I struggled for WEEKS trying to get someone at the IRS to clarify whether I could take the deduction on Schedule C with minimal self-employment income. I kept getting stuck in the automated phone system, and when I finally got through, I'd get transferred and disconnected. So frustrating! Then I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c. They basically call the IRS for you and get you connected to a real person without the wait. Got connected to an IRS agent in about 20 minutes who confirmed I could take the deduction on Schedule C as long as I had legitimate business intent at the time I purchased the tail. Saved me thousands in taxes and countless hours of stress. Definitely worth checking out if you need to speak with someone at the IRS directly about your situation.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it myself since I had another tax question about home office deductions that I'd been trying to get answered for weeks. The service got me through to an IRS agent in about 25 minutes (I timed it). The agent was actually incredibly helpful and walked me through exactly how to document my situation properly. I was honestly shocked at how much more productive the conversation was compared to my previous attempts. For anyone dealing with complex tax situations like this malpractice tail issue, being able to actually speak with someone who can interpret the rules for your specific case makes a huge difference. I'm now convinced that getting direct guidance from the IRS is the way to go for these gray-area questions.

Something else to consider - do you have any 1099 income at all? Even a small amount would strengthen your position for putting the malpractice tail on Schedule C. Maybe a few medical consultations or chart reviews you could do? In my experience (tax preparer), the IRS is less likely to question the Schedule C treatment if you show at least some related income, even if it's minimal compared to the expense. Starting a legitimate business activity with even a small amount of income before filing would give you stronger footing.

Hey just a heads up - I'm an accountant and have worked with physicians in similar situations. Make sure you consider the impact on self-employment taxes too. If you report the tail on Schedule C with zero or minimal income, you'll show a loss that will offset ordinary income but won't create SE tax. However, if your husband has SE income from real estate, your tail expense can't offset his SE tax since it's not related to his business. Each Schedule C is treated separately. You might want to run the numbers both ways (Schedule C loss vs. possibly amortizing the tail over multiple years if you do any 1099 work in the future) to see what makes the most sense for your specific situation.