Magazine article The National Public Accountant

IRS Code Section 105: Tax Deductions for Self-Employed Medical Costs

Magazine article The National Public Accountant

IRS Code Section 105: Tax Deductions for Self-Employed Medical Costs

Article excerpt

Set in place in 1954 but virtually unnoticed for the last 30 years, IRS Code Section 105 holds the power to give the nation's self-employed the tax relief they are searching for when it comes to family members' health care expenses.

In brief, Code Section 105 includes a provision for a 100% tax deduction of medical costs for those self-employed business owners qualifying for spousal employment. Formal employment of the spouse in a sole proprietorship allows that spouse-employee to be compensated with an employee benefits package that would include a Section 105 reimbursement plan for medical expenses incurred by the spouse-employee and family (employer included). Last year, some 50,000 plan participants reported an average tax savings of over $1,800.

When matched with Private Letter Ruling 94 09006 and IRS Technical Advice Memorandum Control No: TR-32-242-93, Section 105 provides tax professionals with the legal means to offer this type of deduction to qualifying, self-employed clients.

When examining filing status' that may be eligible for a Medical Reimbursement Plan, four primary groups have been identified - the sole proprietor, partnership, C corp and LLC.

Again, in the case of the sole proprietor, one spouse must be formally employed by the other to properly establish a Section 105 MRP. Similarly, in the case of a partnership, the partnership cannot exist between spouses. One spouse must not be party to the partnership but must be formally employed by the partnership. …

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