Small Business Owners, Maximize Your Health-Care Benefits While Reducing Tax Liability

Amidst piles of information about the ACA and how it impacts your taxes and financial planning, many taxpayers are confused about what they need to do to take advantage of the benefits available to them. As a small business owner, you can enjoy advantages that can help you maximize your health-care benefits and save more in taxes as well. Entrepreneur gives you a straight-forward 7-step approach of Mark J. Kohler that he shares in his book The Tax and Legal Playbook, which can ease your health care planning and avoid paying more in taxes. 

“Avoid net investment tax

The best way to avoid the net investment tax is to create, transform, or manufacture income that isn’t subject to the tax. The types of income that aren’t subject to this tax include S corp pass-through income, sale of property (if you or your spouse are a real estate professional), self-employment income (the additional Medicare tax provision still applies), and retirement income.

The strategies for avoiding the net investment tax are: 

• S corps to reduce salary and funnel K-1 income 
• 1031 Exchanges to exchange properties without incurring taxes 
• Installment sales of property
• Charitable remainder trusts for receiving income on property that you will donate after you die 
• Self-directing your retirement investments and using Roth IRAs and 401(k)s

Choose the right health insurance policy 

• Be aware of what enrollment options are available in your area.
• Understand the ‘metal’ health insurance plans and the differences between each one. Essentially, you will have to choose between a Platinum, Gold, Silver, or Bronze plan with different benefits, deductibles, and premiums. 

• Know your network. Who’s the doctor you want to use? What hospital? As you look closer, you may be surprised to see a wide range in premiums between the different types of plans based on the network. The savings under certain policies are because the insurance company provides a smaller network of doctors under the plan, which may also be stripped of benefits like dental or vision care. 
• Bet on your health. If you’re healthy and want to self-insure yourself in the future, you can often get a lower premium with a higher deductible and fund a Health Savings Account (more on this below). 
• Cash in on your business. Rely on your status as a small-business owner whenever possible. Don’t forget that you have an edge when shopping for policies. You can possibly shop for an individual policy or a business policy if you’re going to provide insurance for two or more employees.  

Deduct your health insurance correctly 

Health insurance is 100 percent deductible for the small-business owner. A nonbusiness owner would have to try and itemize these costs, more than likely to no avail. Make sure your CPA is aware of all health insurance premiums you’re paying and that they’re properly accounted for. 

Use the small-business health care tax credit 

This little gem is a literal dollar-for-dollar tax credit against any taxes you owe and up to 50 percent of any health-care premiums you pay for on behalf of your employees. There are a number of simple, very manageable rules. For example, you’re required to cover at least 50 percent of the cost of single (not family) health-care coverage, you must have fewer than 25 full-time-equivalent employees, and those employees must have average wages of less than $50,000 a year. If you have employees, look into it and run the numbers. It’s a great way to provide a perk for employees that also gives you a tax credit. 

Deduct your medical expenses strategically

Surprisingly, writing off your medical expenses (not insurance) has gotten increasingly difficult for the average American. It can be done, but it takes a little more creativity; again, being a small-business owner gives you a strategic advantage. 

Essentially, I suggest my clients consider either a Health Savings Account (HSA), a Health Reimbursement Arrangement (HRA), or a combination of the two. I discuss these more fully below. 

Start a health savings account (HSA) 

Essentially, HSAs are for the healthy and don’t require that you have a small business. However, you must have a high deductible/qualifying health insurance plan. The reason I like these for business owners is because, as an entrepreneur, you’ll typically have much more control over your health insurance plan and can use creative strategies to acquire the right type of insurance. 

To hit the highlights, HSAs are pretax accounts, contributions are deductible on the front page of your tax return (regardless of your income level), and the monies in the accounts grow tax-free. Tax-free withdrawals can be made any time for health-care expenses.

Understand health reimbursement arrangements 

A Health Reimbursement Arrangement (HRA), sometimes referred to as a Section 105 Plan, is a strategy for the unhealthy. When I say ‘unhealthy,’ I simply mean those with higher-than-average medical expenses; HRAs work for those whose insurance plans may not cover everything they need–for example, dental costs, copays, prescription medications, or chiropractic or acupuncture services.

However, this strategy is exclusive to small-business owners. The HRA essentially allows you to set up your own ‘benefit plan’ for health care and reimburse yourself for all your health-care expenses, thereby getting a 100-percent write-off for all medical expenses. 

Regrettably, if you’re operating as an S corp, you can’t adopt an HRA for yourself. Moreover, if you simply have rental property held by an LLC, you can’t use an HRA. There are very specific methods for implementing an HRA, which differ depending on whether you’re single or married.”