Section 105 Plans: How to Deduct Medical Expenses as a Business Expense

Unless your medical expenses are substantial, a 10% limitation rule eats up most or all of your deduction for out-of-pocket medical costs. The more money you make, the less you can deduct.

I explain this more fully Here, and I also explain HSAs, which many taxpayers can use as a tax advantaged method of purchasing health insurance.

But there’s an even better way to deduct 100% of your medical costs if you own a small business, or are self-employed. It’s called a medical expense reimbursement plan, otherwise known as a “MERP” or “Section 105 Plan”.
A MERP is an arrangement where you reimburse employees for out-of-pocket health or dental expenses.
If you are a real estate agent, or home business owner, you should definitely consider adopting such a plan. The potential tax benefits are substantial if you must obtain your own health insurance, are married, and need or want your spouse to work as an employee in your home business.
For example, if your spouse is an employee in your business, he or she can submit to the business any expenses for health and accident insurance, deductibles and co-pays. The business reimburses your spouse for these medical costs, and they become 100% deductible business expenses. (No more limitation of the costs needing to be more then 10% your adjusted gross income).
These costs include out of pocket medical costs
  1. for your spouse
  2. for your spouses dependents, and
  3. for your spouse’s spouse (you!).
This lowers your taxable income, and it also lowers your self-employment tax.
Imagine making the following expenses 100% deductible as business expenses:
  • acupuncture
  • chiropractors
  • eyeglasses
  • dental treatment
  • laser eye surgery
  • braces (orthodontics)
  • psychiatric care
  • treatment for learning disabilities
  • and many other expenses not normally covered by health insurance.
Tax Tip: your spouse must be a legitimate employee. You can’t simply hire your spouse on paper; he or she must do real work in your business. Make a job description, keep timesheets, and pay him or her by check, with payroll taxes deducted. This paper trail will be the documentation you need if the IRS audits your return.
ANCHOR ON THIS: you can deduct 100% of your medical costs if you know the IRS rules, set up your business accordingly, and keep a proper records. If you know the IRS rules, you can deduct your child’s braces and call it a business expense. If you have questions, or need help setting up a section 105 plan, contact us
Jim Flauaus, EA
Enrolled to Practice before the IRS
Posted in Small Business.

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