Medical Bills Deductions

(under an employee benefit program), by Michael Hengst

We would like to bring to your attention a tax saving plan that is relatively unknown.  This plan is for the sole proprietor of a small business or C Corporation.  A partnership or S Corporation cannot successfully use this plan for its owners.  The plan allows for 100% tax deductibility of health insurance premiums and uninsured medical expenses paid by the business.  The deduction can be taken as an employee benefit program deduction, on Form 1040, Schedule C, Line 14 or on Form 1120, Line 25.  Internal Revenue Code 105 & 106, along with Revenue Ruling 71-588 make this plan legal.  This is not a Medical Savings Account (MSA), which tends to be quite cumbersome, hard to manage, and easily penalized by the IRS.  The taxpayer has or sets up a small business and employs his wife or her husband.  (For a C Corporation there is no spousal employment requirement.)

The employee/spouse performs duties needed to help operate the business and receives a reasonable salary for services performed.  The salary paid to the employee/spouse is included on the couple’s federal individual income tax return.  The spouse and dependents (including the employer/spouse) can also receive non-taxable medical reimbursements for qualified medical expenses.  The reimbursement received is not included in gross income for the recipient (Code Section 105) and is fully deductible by the business.  Although legally these plans do not have to be in writing, it is our opinion that they should be.  We have a simple one page form at our office for you.  This will help insure the law is properly followed.  The plan cannot discriminate in favor of a certain employee(s) over others.

The benefits paid by the business along with the reimbursements make this a 100% tax deduction.  Benefits can include:  all uninsured medical expenses (deductibles, co-pays, uncovered expenses), Health Insurance, Disability Income, Long Term Care, Cancer Insurance, Term Life Insurance (up to $50,000 per year), Medicare Supplement, Indemnity Hospital, Indemnity Medical, and Vision/Hearing Insurance.  The uninsured medical expenses that are not covered by insurance should be for the diagnosis, cure, mitigation, treatment, or prevention of disease.

A physician should prescribe the medications.  Also deductible if not covered by the benefits is lodging while away from home while a spouse is in a licensed hospital or in a medical care facility.  The lodging is limited to $50 for each night for each individual.  A medical expense such as cosmetic surgery is not included unless the surgery is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.  If you feel that you or your business may qualify for this plan, please contact us.

NEW FOR 2003!! According to the IRS’s new Revenue Ruling 2003-102 (9/5/03):

Over-the-Counter Drugs Can Be Covered by Health Care Flexible Spending Accounts.  The Treasury Department and the IRS announced over-the-counter drugs can be paid for with pre-tax dollars through health care flexible spending accounts.  Treasury and IRS issued guidance clarifying that reimbursements for nonprescription drugs by an employer health plan are excluded from income.  Thus, reimbursements by health flexible spending arrangements (FSAs) and other employer health plans for the cost of over-the-counter drugs available without prescription are not subject to tax if properly substantiated by the employee. See: http://www.irs.gov/pub/irs-drop/rr-03-102.pdfNote, that vitamins for “general good health” are not considered as non-taxable or excludable health benefits for these types of plans.

By Michael Hengst,

Michael Hengst