Tax tangle: Medical deductions for LLC owners
Business owners can write off many of their health care costs, but complying with IRS rules requires some planning.
Jonathan Cottor, Scottsdale, Ariz.
I have an LLC, and I’m seeking some advice about my family’s medical expenses. One accountant told me they can be run through the LLC as a business expense, and I’ve been paying the insurance premiums and any eligible co-pays and FSA-qualifying-type out-of-pocket costs through the business as an expense. I haven’t set up a separate HSA account, since the medical expenses run through the business and reduce my taxable income anyway when it pulls over to my personal return.
Another accountant has questioned this logic, and advised me that medical expenses need to reside solely on my personal return and are not business expenses. Who’s right?
By Lenora Chu, CNNMoney.com contributing writer
The second accountant is closer to the mark. For the most part, you'll need to treat medical costs as personal expenditures.
As a general rule, a business can only deduct expenses if they're “ordinary” and “necessary” for the operation of the business. Medical expenses for a member of an LLC are not considered “ordinary and necessary,” says Scottsdale, Az.-based tax accountant Phillip Wuollet of Johnson, Harris & Goff.
However, you still have options for cutting medical spending out of your tax bill.
You can deduct the premiums for your coverage using the "Self-Employed Health Insurance Deduction" on your personal return, according to Debbie Oster, director of tax compliance at Margolin, Winer & Evens, LLP in Garden City, N.Y. That will let you deduct 100% of the premiums paid for yourself, your spouse, and your dependents.
If the LLC pays for your coverage from its own coffers, it would need to classify that expenditure as a "guaranteed payment" to you. The business can deduct guaranteed payments as expenses, but then on your person return, those payments need to be included as income.
“If you pass it through as ‘guaranteed,’ you’re deducting it out of one pocket and adding it to another,” says Wuollet. “You’re just transferring money between accounts.”
If your insurance premium is passed through in that fashion, you can still deduct 100% of it off your personal return.
Co-pays and other incidental medical costs are considered your own expense — not the LLC's — and need to be included on your personal return. The IRS only lets you deduct medical bills, though, when they get extremely high: more than 7.5% of your AGI (adjusted gross income).
To get more tax protection, you could set up an HSA (health savings account), as you mentioned. Another relatively new option is a "section 105" health reimbursement plan. Under that arrangement, you contribute a fixed amount for each employee to an account that they can tap to pay for medical expenses.
Contributions to these accounts are tax-deductible for the company, and when the worker accesses the funds, those reimbursements are not considered taxable income, Wuollet says.
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From J. Snyder, Cleveland, OH IF you open a HSA (assuming you have a HSA qualified health plan) you can make a contribution of $5950 in 2009. Although this is a after-tax contribution going in (because you are owner of the LLC) you get an above the line deduction on your return which is more like a tax credit then a deduction. This HSA contribution is free from federal, state and local tax. The only savings you are missing because you are the owner is the FICA savings, that employees would receive if they made a pre-tax HSA contribution. Note, the HSA contribution is not dependent on your medical expenses and can be rolled over to next year if the money is not used in the same year.
Note, most CPA's are not well versed in HSA regulations and typically give out mis-information. I know this as fact because they call me everyday with questions!
From Tracy, Atlanta, GA All should realize that LLC's are a unique organization that may elect how they want to be treated for tax purposes. This article assumes the LLC is filing a partnership tax return. However, there are options the company may elect and could possibly file as an S corporation or even as a sole proprietorship.
In addition to the LLC options, there are several methods available to business owners to make the cost of health care less taxing and therefore more manageable. One option is a VEBA plan that includes a health care reimbursement plan.
I strongly recommend speaking with a Certified Public Accountant with a strong tax practice to gain a better understanding of what might work for you and your business.
A company cannot contribute to the HSA account of individuals owning 2% or more of the company), pay HSA administrative fees on their behalf and write it off as a business expense (as they could do for contributions to other employees). The 2% + owners or Partners themselves can have HSA compatible coverage and establish HSAs. They would need to contribute with their own after-tax dollars. Because the 2%+ owners or Partners are not receiving an employer contribution, they can choose to fund their HSA in anyway they see fit and are not limited by the IRS HSA comparability rules. At the end of the year, the Owners/Partners would deduct their HSA contributions from their individual tax return. For more info http://www.sterlinghsa.com/AboutHSAs/faqs.php?mode=sections&s=8