How to Deduct Medical Costs as Business Expenses

It’s not easy to deduct medical costs on your tax return. In fact, unless your medical expenses are 10% os your Adjusted Gross Income, you can’t itemize them on your Form 1040.

I explain one tax strategy Here, which many taxpayers can use to pay for out of pocket medical costs with pre-tax dollars.

But there’s an even better way to deduct your medical costs: You can write-off out of pocket medical expenses as a business deduction 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.
How it Works:
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 for
  1. your spouse (who is your employee)
  2. for your spouses dependents, and for
  3. your spouse’s spouse (you!).
 This not only lowers your taxable income, but also lowers your self-employment tax.
Here’s What’s Included:
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