Looking for a legal way to deduct all our medical expenses on your small business income tax return? Read on.
The tax rules make it very difficult, if not impossible, to do so on your personal income tax return. First, you must itemize deductions on Schedule A. Since two-thirds of taxpayers take the standard deduction, this requirement means that most will not be able to deduct medical expenses.
Second, if you do itemize, your medical expenses must exceed 10% of your adjusted gross income (AGI). And even if they do, you only get to deduct your medical expenses to the extent they are greater than the 10% of AGI threshold. Example: Your AGI is $75,000. Since 10% of $75,000 is $7,500, your first $7,500 of medical expenses are not deductible. If you have $8,000 of medical expenses, only $500 would be deductible on Schedule A. How depressing is that?
Get the picture? For the average taxpayer, having a line on Schedule A for medical expenses is really a cruel joke. It’s there, but chances are very slim that you’ll get to use it.
If you are a small business owner, however, there is hope. The medical reimbursement plan (MRP) gives you the opportunity to legally deduct all your out-of-pocket medical expenses (those not covered by insurance) as a bona fide business expense. How does that sound?
If your business is a sole proprietorship, here’s the best scenario for this strategy to work: you are married and your spouse is the only employee of the business. You must first establish the medical reimbursement plan with the appropriate paperwork (yes, this plan does require documentation, so be sure to consult with a tax professional to make sure you do this right).
As an employee of the business covered under the MRP, your spouse submits documentation of all out-of-pocket medical expenses on a regular basis. This could be as often as you like, such as monthly or quarterly. The business then reimburses your spouse for those medical expenses – all 100% of them. The end result is that the business gets a deduction for the reimbursement, and your spouse receives a tax-free employee benefit. How cool is that?
Again, make sure that you do the paperwork right. Make sure your spouse submits receipts for the out-of-pocket expenses, and be sure to issue a business check to your spouse for the reimbursement. No monkey business here.
A warning is also in order here: if your business has employees other than your spouse, the MRP may not be the way to go, because you must offer this benefit to all your employees.
If your business is an entity other than a sole proprietorship (i.e. a corporation, partnership or limited liability company), the rules can be somewhat different than those for a sole proprietorship, so again, get help from your tax pro if you’re not sure how to setup and maintain the MRP properly.
i am a sole proprietor who is not currently married. however, i do have 4 children. it seems to me that i could do this if they are employees (they are) for their expenses but what about my own expenses. am i out of luck with those?
You are correct — since your children are your employees, they can each participate in the Medical Reimbursement Plan. For yourself, you can deduct your own medical expenses via a Health Savings Account — see IRS Publication 969 for details on that.