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Cincinnati Business Courier (January 2, 1995)If properly structured, the benefits package can be a fully deductible business expense. For years, large corporations have been able to deduct all medical expenses they pay for employees. Small businesses can enjoy those same benefits by restructuring themselves. For the past few years, sole proprietors and partners in a partnership have been allowed to deduct 25 percent of their health insurance premiums. With the current law, you can still deduct medical expenses if they exceed 7.5 percent of your adjusted gross income as an itemized deduction. If you pass this test, then your total itemized deductions have to exceed $6,350 for couples filling a joint return. If you're a sole proprietor, C-Corporation or a partnership and you can legitimately employ your spouse, you may be able to deduct 100 percent of compensation plan which includes both wages and fringe benefits, your employment situation must conform to all Internal Revenue Service and U.S. Department of Labor standards. Fringe benefits that can be deducted include:
Suppose you and your spouse pay $4,000 for medical insurance premiums. In addition, your medical expenses not covered by insurance total $2,000 for the year. Under the current tax law, if the $6,000 is less than 7.5 percent of your adjusted gross income you have no itemized deduction for medical expenses. Suppose the small business owner employed their spouse and has a properly designed medical-reimbursement plan. In such cases, you can deduct the entire $6,000 as a business expense. Assuming a 28 percent federal tax bracket and a 5 percent state tax bracket, the taxpayer would save about $2,000 in taxes. In addition to federal and state taxes, the fringe-benefit package reduces Social Security and Medicare taxes as well. One of the key requirements of this fringe-benefit package is that your spouse must be a "legitimate" employee of the business. The spouse must be able to provide services that are considered necessary for the success of the business. In addition, the total compensation package must be reasonable for the duties that your spouse-employee performs. An employment agreement is required for the spouse-employee. This agreement should specify the services preformed, the compensation for these services and the benefits provided. A plan document should list which medical expenses are included in the plan. The package could be arranged to cover health insurance premiums. In addition to health insurance, you may want to include medical costs not covered by insurance, term-life insurance and long-term disability insurance for your spouse-employee. Once the benefit package is implemented, all eligible costs should be paid out of the business checking account. If the only employee for the business is your spouse, it makes sense to include as many benefits as possible. If you have employees other then your spouse, you must follow the nondiscriminatory rules and regulations required by the labor department. These rules require that you cover;
Please not that under current regulations, shareholders who own more then 2 percent of an S-Corporation are not eligible for this benefit. Once the decision is made to implement a medical reimbursement plan under Section 105 of Internal Revenue Code, some additional steps must be taken to insure compliance. An employer must obtain a Federal Identification Number from the IRS, issue paychecks on a regular basis from the business checkbook and prepare W-2, W-3, 940 and 941 forms as required by the IRS. The plan must be established by Dec. 31 of the tax year. Charles P. Vonderhaar is a certified public accountant in Reading.
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