Section 105

[JG EA]

Does anyone have any thoughts on Schedule C, wife employed by the husband doing bona fide work, taking a health insurance deduction for the family?

My question is the caution - if the wife is more a co-owner - then not allowed. Has anyone had experience as to when this would be disallowed because the wife is more a co-owner than an employee? Would it perhaps apply to only community property states or could it apply anywhere. Or is there another distinction having nothing to do with community property?

I have in the past dismissed this as not cost effective because of the charge for payroll preparation or charges for the services of an organization that sells this product. But there is a client that wants to do all the work themselves and would save money this way.

[oceanlovin'ea]

Do you mean

a deduction as an expense on the Schedule C or the adjustment to income for self-employed persons?

My husband is my employee. He has a full time job as an accountant for a large corporation. But he helps me with many things in my business, especially during tax season. He does things that aren't necessarily tax related, but with the bookkeeping accounts, making up my deposits, etc. He is also an excellent PR person for me.

I have a medical reimbursement plan set up and each month I reimburse him for medical expenses he and his family (me) have to pay out of pocket. That is a legitimate deduction.

The information I have on this only requires that the spouse do legitimate work for the business and that a plan be on file in the company records.

I have never heard of anyone having problems with this expense.

Linda F

[Newbie]

Plan document

Where's the best place to review a sample Section 105 plan?

[Jim R]

Sec 105

The medical insurance under sec 105 is a deduction on Schedule C thus saving SE tax. Also with a Medical Reimbursment Plan, it makes out of pocket medical expenses a business deduction. I have a hard time seeing why this would not save significant taxes unless Schedule C profit is above $95,000.

Rumor has it that the IRS is starting to challenge these claiming the spouse is actually a partner not an employee. I would also be interested if anyone else heard ot this happening or experienced it.

[jimmcg]

Represented a Sch C taxpayer about two or three years ago where the Service examiner attempted to show that the spouse was really an owner partner rather than an employee. This was a weak attempt on his part to disallow the Sec 105 Sch C deduction for the spouse. Our position was to show that the expertise and ability of the owner was far greater than the spouse and the spouse was treated (job description, etc.) as a true employee and not an owner. We also told the examiner that we would protest to the appelate level if necessary. It worked and we prevailed. This was the only time I have come across the Service trying to take this approach.

[S T]

Sect 105

A question, seems like I read somewhere way back whenever, that there had to be a plan under Sect 105, and there had to be an administrator to that plan, particularly related to a Husband/Wife, and one of the spouses were allocated as an employee with payroll taxes paid.

So question, can the employer (Schedule C) just write a plan and establish, or does it have to be written and administer by a 3rd party which would include fees paid to the 3rd party???

Sandy

[Bees Knees]

So question, can the employer (Schedule C) just write a plan and establish, or does it have to be written and administer by a 3rd party which would include fees paid to the 3rd party???

Regulation Section 1.105-11(b)(1)(i) says that a self-insured medical reimbursement plan is a separate written plan...

Anytime you deal with something where the regulations require something to be in writing, I would want a specialist in that field to provide the proper documentation. It’s like telling a client to see a lawyer to incorporate. Yeah, I know there are do it yourself documents out there, but I would want to make sure all of the T's are crossed and I's are dotted.

[DaveO]

I think it would strengthen your case if wages amounted to more than just the insurance and medical reimbursement. I have never had the service challenge one of the plans but I have seen divorce attorneys tear them looking for hidden income. Especially in cases where the spouse doesn't have enough FICA wages to pay in their quarters.

[Black Bart]

A related matter

Just read that bills have been proposed in Congress to transfer the SE health deduction from above-the-line to a Schedule C deduction and thereby reduce net earnings subject to Social Security and Medicare.

Business groups are enthusiastic. Unfortunately, overall Congressional interest is tepid.

[Snaggletooth]

Only one employee

In many cases where there is a single proprietor and no employees, I take a health insurance deduction because he is providing health insurance to all employees, and HE is the only employee.

I've never been challenged, but I'm certain the idea will be looked upon by an examiner with a jaded eye. The insurance line on Schedule C forbids health insurance, so I include it on the line for "Employee Benefit Programs." I also caution the proprietor that if he does in fact hire bona fide employees, then this treatment obligates them to provide health insurance to them. If most of these proprietors actually hire anyone, they put them on a subcontractor basis -- to avoid employee treatment (that is another conversation).

I'm sure my above-described deduction for health insurance will not meet with universal approval from the readers. But the exact same treatment would be perfectly kosher if these proprietors actually paid themselves a paycheck, filed quarterly taxes, tax deposits, and went through all the miserable hoops. Miserable not only for him but for his accountant as well.

Regards, Snag

[JON]

Cover

everyone?? There may be a state law that requires coverage, but there is no federal law. You can discriminate in health coverage. Schedule C sole proprietor, only employee the health insurance coverage is page one of the 1120, not on the C. The only difference should be SE tax, but there is still a difference.

[Unregistered]

Yes, Snaggletooth, you are right - you will not get universal approval for your approach which is clearly incorrect. I suggest you read §162(l)(4) of the Internal Revenue Code.

New York Enrolled Agent