If you own your own business, you need this information! Many business owners don’t know about this business tax loophole, or if you have heard about it, you may think it can’t possibly be legitimate.
I’ve been a tax consultant since 1993, and I’ve set several clients up with a business program to take advantage of this relatively-unknown part of the U.S. tax code. When it’s set up, documented, and used properly, it can make a tremendous difference in your tax bill every year. This is a part of the tax code that’s been around since 1954!
Many business owners know that they can deduct their medical insurance premiums through their business. But did you know you can also deduct through your business:
• Out of pocket expenses for all your medical, dental, and vision expenses
• Your co-payments for office visits and prescriptions
• Mileage to and from your doctor or dentist office
• Up to $50,000 of term life insurance for you (the business owner)
• Long term care insurance premiums
• Accident and disability insurance premiums
Depending on your business structure and the plan you put in place, you might also be able to deduct costs for:
• An on-site fitness facility
• Over-the-counter medications (aspirin, antacids, cough syrup, pain relievers, ointments, etc.)
Some real-life examples from my client file:
• Brian and Jenny’s (not their real names) beautiful baby daughter was born with a congenital problem that required life-long treatment and medical procedures. They restructured their business and put their plan in place. Every penny that insurance didn’t cover was deducted through their business, saving them thousands of dollars in taxes;
• Joe and Marisa were faced with the possibility of expensive medical bills. Although they had an incredibly profitable business, the thought of taking all that profit to first pay taxes and then pay their medical bills was depressing. They restructured their business to take full advantage of all the program benefits and saved nearly $20,000 in taxes!
This program isn’t for everyone. You have to have a legitimate business. If you are a sole proprietor or in a general partnership, you have to be married and able to legitimately employ your spouse. If you own an S-corporation, you may not be able to get the full benefit of the program.
But don’t you owe it to yourself and your family to find out more, and see what you can save? The average tax savings for sole-proprietors along is $2500 PER YEAR.
Just follow this link for all the details: www.FlexAffiliates.com/plan/ebizCFO.
Bill Bourbonnais EA, ebizCFO, LLC
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Wednesday, August 27, 2008
Sunday, August 24, 2008
Beware of the Medical Expenses Trap!!
A great way to deduct your medical expenses through your business has been around since 1954, but hasn’t garnered much publicity until about the last ten years or so.
A Medical Expense Reimbursement Plan (MERP), also known as a Health Reimbursement Account (HRA) can save a self-employed person several thousands of tax dollars each year, but if it’s not documented properly can result in reclassification of the deducted expenses as wages (subject to 15.3% FICA taxes as well as income taxes), penalties, and interest.
In most cases, the average taxpayer cannot take advantage of the legal deduction for qualified medical expenses. First, you have to be able to “itemize” your deductions on Schedule A of your 1040. This means that for 2008, things like your state income taxes, property taxes on your house, value-based taxes on vehicles, and mortgage interest, and some other items, need to total up to more than $5450 if you’re single or $10,900 if you’re married. Once you’ve determined that you’re close to clearing that hurdle, you need to total up your qualified medical expenses. But you’re not finished yet: now the government wants you to REDUCE those medical expenses by 7.5% of your adjusted gross income (AGI). This means you’ll take the total of all your wages, business income, interest and dividends, capital gains, retirement income, social security income, alimony, jury duty pay, etc., subtract out a few adjustment items such as alimony you paid, IRA contributions, student loan interest, self-employed health insurance, etc. and subtract 7.5% of THAT total from your qualified medical expenses. So, for example, if your total AGI is $50,000, then the first $3,750 of medical expenses don’t even count as a deduction!
Now, let’s take a look at what happens if you have a qualified business and set up a Health Reimbursement Account. First, the $3,750 you couldn’t deduct before becomes a business deduction. You don’t have to adjust it by any percentages of AGI or any other number. This becomes a tax-free fringe benefit through your business. Second, as a deductible business expense, if you are a sole proprietor or farmer or other “flow-through” business, you have probably saved around $1050 in income taxes (assuming a 28% tax bracket.) Then, if you are a sole proprietor, farmer, or partner in a general partnership, you’ve just saved 15.3% self employment tax, or $547. If you’re total medical expenses (including medical mileage for trips to the doctor, dentist, and pharmacy) are more than $3,750, your tax savings increase accordingly.
These plans are a great tool, but you have to have a legitimate business AND the plan MUST be properly documented. This is one of the areas that IRS reviews for abuse and incorrect procedures. If you do not follow the documentation requirements, that $3,750 in legal business expenses just turned into taxable wages, and added over $1,600 to your tax bill, plus interest and penalties. This is an expensive mistake for overlooking three simple documents: a plan adoption agreement, a plan summary, and an employer-employee agreement including job descriptions and compensation plan.
If you are self-employed or own your own business and are not taking advantage of an HSA, you are leaving money on the table that could help you personally and provide an incentive plan to attract and retain quality employees.
Although these plans are relatively easy to set up and maintain, we recommend using a professional who is very familiar with the plans to make sure your documents are in order and required disclosures are made, as well as correct handling of your payroll.
For more information please visit
www.FlexAffiliates.com/plan/ebizCFO
Bill Bourbonnais, EA, ebizCFO, LLC
A Medical Expense Reimbursement Plan (MERP), also known as a Health Reimbursement Account (HRA) can save a self-employed person several thousands of tax dollars each year, but if it’s not documented properly can result in reclassification of the deducted expenses as wages (subject to 15.3% FICA taxes as well as income taxes), penalties, and interest.
In most cases, the average taxpayer cannot take advantage of the legal deduction for qualified medical expenses. First, you have to be able to “itemize” your deductions on Schedule A of your 1040. This means that for 2008, things like your state income taxes, property taxes on your house, value-based taxes on vehicles, and mortgage interest, and some other items, need to total up to more than $5450 if you’re single or $10,900 if you’re married. Once you’ve determined that you’re close to clearing that hurdle, you need to total up your qualified medical expenses. But you’re not finished yet: now the government wants you to REDUCE those medical expenses by 7.5% of your adjusted gross income (AGI). This means you’ll take the total of all your wages, business income, interest and dividends, capital gains, retirement income, social security income, alimony, jury duty pay, etc., subtract out a few adjustment items such as alimony you paid, IRA contributions, student loan interest, self-employed health insurance, etc. and subtract 7.5% of THAT total from your qualified medical expenses. So, for example, if your total AGI is $50,000, then the first $3,750 of medical expenses don’t even count as a deduction!
Now, let’s take a look at what happens if you have a qualified business and set up a Health Reimbursement Account. First, the $3,750 you couldn’t deduct before becomes a business deduction. You don’t have to adjust it by any percentages of AGI or any other number. This becomes a tax-free fringe benefit through your business. Second, as a deductible business expense, if you are a sole proprietor or farmer or other “flow-through” business, you have probably saved around $1050 in income taxes (assuming a 28% tax bracket.) Then, if you are a sole proprietor, farmer, or partner in a general partnership, you’ve just saved 15.3% self employment tax, or $547. If you’re total medical expenses (including medical mileage for trips to the doctor, dentist, and pharmacy) are more than $3,750, your tax savings increase accordingly.
These plans are a great tool, but you have to have a legitimate business AND the plan MUST be properly documented. This is one of the areas that IRS reviews for abuse and incorrect procedures. If you do not follow the documentation requirements, that $3,750 in legal business expenses just turned into taxable wages, and added over $1,600 to your tax bill, plus interest and penalties. This is an expensive mistake for overlooking three simple documents: a plan adoption agreement, a plan summary, and an employer-employee agreement including job descriptions and compensation plan.
If you are self-employed or own your own business and are not taking advantage of an HSA, you are leaving money on the table that could help you personally and provide an incentive plan to attract and retain quality employees.
Although these plans are relatively easy to set up and maintain, we recommend using a professional who is very familiar with the plans to make sure your documents are in order and required disclosures are made, as well as correct handling of your payroll.
For more information please visit
www.FlexAffiliates.com/plan/ebizCFO
Bill Bourbonnais, EA, ebizCFO, LLC
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