Congress Revives Health Insurance Deduction : Taxes: Clinton is expected to sign legislation allowing self-employed to claim 25% of premiums.

For thousands of small-business owners who have been holding on to their 1994 income tax forms until the last minute, it was apparently worth the wait.

The House and Senate have agreed to permanently restore a deduction for the health insurance premiums paid by the self-employed. Though it had been renewed annually since 1986, the deduction died last year after becoming mired in President Clinton’s health care proposals.

This year, it got entangled in partisan budget and tax-cut haggling, but finally emerged unscathed Monday afternoon after bitter wrangling.

As passed, it would allow the self-employed to deduct 25% of their health insurance premiums from their total earned income in 1994. For 1995 and thereafter, the deduction would be 30%.

The measure, which now awaits Clinton’s signature, would go into effect later this week, just in time for the April 17 income tax filing deadline. Clinton is expected to sign it, according to the National Assn. for the Self-Employed.

“Some accountants had been calling me every day for the last month saying they had dozens of returns sitting on their desk waiting to file,” said Benson Goldstein, legislative and tax counsel in Washington for the association.

Because the deduction amounts to only about a $500 to $1,000 deduction for most self-employed, many decided to play a waiting game rather than turn in their tax forms early and file an amended form later, said Elaine Price, a Santa Monica certified public accountant. The deduction will apply to about 3 million unincorporated sole proprietorships and partnerships nationwide, Goldstein said. It represents a $3.4-billion loss in federal revenue over the next five years.

House and Senate leaders needed to come up with a way to offset the reduced revenue. After heated debate, they decided to revamp earned income tax credits and do away with tax breaks formerly given to broadcast firms that sell outlets to minority investors.

For small-business owners, the partial deduction is only part of an overall package of tax revisions they seek. For starters, the NASE and other small-business groups want a 100% health insurance tax deduction.

“As a self-employed person, I can write off only 25%, while a corporation gets to write off 100%,” complained Beverly Hills masseuse Debra D’Amato, an NASE member.

As a result, many self-employed get only minimum or catastrophic insurance coverage because the premiums are too high, D’Amato said.

The small-business groups also seek restoration of deductions that apply to home-based businesses, and they want a clearer definition of the distinction between an independent contractor and an individual employed by a company.

Debra Schacher, chief executive of the Home Office and Business Opportunity Assn. of California, said her group seeks more liberal tax deductions for home office use. After a 1993 U.S. Supreme Court ruling changed tax laws, home-based business owners faced more stringent requirements, among them that customers must physically visit a home office before it can be legally declared a workplace and eligible for a tax deduction.

“There’s not a traditional office workplace anymore. It has changed dramatically,” Schacher said. “The tax laws should reflect that a growing group of people are choosing to work out of their home.”