Tax tangle: Medical deductions for LLC ownersJuly 29, 2009: 12:37 PM ET
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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