The self-employed got some relief on a long-standing sore point -- tax deductions for health insurance -- in the $520 billion Omnibus Spending Bill that Congress passed this week.

The new measure lets self-employed people deduct more of their health-insurance costs immediately and accelerates the timetable for full deductibility. Right now, the self-employed can only deduct a part of their health-insurance costs. That puts them at a disadvantage with big employers, who can claim all health-care payments for their workers as a business expense on their tax returns.

The disparity was destined to disappear in 2007, anyway. But after much prodding by small-business activists, a provision in the budget bill was added that advances the deadline to 2003 and makes the existing deductions more generous each year. In 1999, self-employed people will be able to write off 60% of their health-insurance costs, up from 45% this year. In 2002, the threshold rises to 70%, reaching 100% in 2003. Previously, the deductions were to rise to 50% in 2000, 60% in 2002, 80% in 2003, 90% in 2006, and 100% in 2007.

It may seem like small change, but health-care deductions affects some 11 million sole proprietors, "S" corporations, and partnerships, says Jim Weidman, a spokesman for the National Federation of Independent Business. All told, the change is expected to cut taxes for those who are self-employed by $3.5 billion in the next 10 years.

On a practical level, if entrepreneurs already have health-care insurance, this helps by letting them deduct the cost. If they don't, this change might make coverage more affordable.

Some wily entrepreneurs already deduct a full 100% of their coverage. How? By hiring their spouses. Although the sole proprietor cannot fully deduct his own policy, he can write off 100% of an employee's -- even if that employee is his spouse. And as an employee, your spouse can extend coverage to the entire family -- including you.

If you are not married, of course, you will have to wait till 2003 to get full relief. Still, if the idea behind the bill was to promote better health care, then this Band-Aid is better than nothing.

By Julia Lichtblau in New York
Julia_Lichtblau@businessweek.com

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