Medical reimbursement plans for self employed individuals (sect. 105 plans)

We all know that health insurance premiums for self employed individuals (individuals filing Schedule(s) C, E, or F on their personal income tax return) are deductible on the front page of a personal income tax return. The issue becomes much muddier when you have a self employed individual that has a wife and children, whom are not covered under their own plan. One tax smart move, may be to start a section 105 medical plan.

This plan also known as a self-insured medical reimbursement plan offers many benefits (and a few pitfalls, if it is not implemented properly).

Usually, the first step in this exercise is to hire the spouse of the self employed individual as an employee. A helpful hint in this exercise is to draft an employment contract with the spouse employee, highlighting job duties, pay, hours of work required, etc. This employee will receive compensation for his/her work, but much of that compensation may end up being paid through tax-free reimbursements of medical expenses.

The second step is to create the plan. The employer must have a plan document and provide both the plan document and an agreement with all employees.This document offers them coverage under the plan. Keep signed copies of both the plan document and employee offers in a safe place. The plan document should highlight specific definitions, as well as how medical expenses will be reimbursed. In addition, most plans of this type have a maximum dollar amount that the business will reimburse for employees (this as well as other things can be amended in the future).

Benefit(s):

1. For the spouse- They receive medical reimbursements tax free.
2. For the family- They would have previously filed these expenses on Schedule A and had to apply a 7.5% (of AGI) floor against these medical expenses before a deduction would have been available. With this change they do not have to worry about this ‘penalty’.
3. For the business- These items are deductible against self-employment income avoiding the additional tax (SE) on their personal income tax return.

Warning- Follow these steps very carefully and do your homework. There is nothing illegal or improper about these plans, but the IRS is on the lookout for self employed individuals who are not following the rules and attempting to avoid paying their fare share of taxes. For more information consult IRC section 105, your accountant, or tax attorney.

Qualified Small Business Stock

One of the most overlooked aspects of incorporating is the use of Qualified Small Business Stock (QSBS), but thanks to recent changes, the use of this stock may be more attractive than ever.



For small businesses forming from September 16, 2010 through December 31, 2010, the excluded gain upon sale of the business may qualify for 100% exclusion.



There are certain limitations as to what type of businesses qualify for QSBS, as well as dollar contribution limitations. But, if you are looking to incorporate a business between now and year end you owe it to yourself to look into QSBS and talk to a tax professional about its benefits and limitations.



Please note- in order to qualify you must hold the stock for at least five years, and other limitations do apply.

Start-up expense deductions increased for 2010

Business start-up costs, also known as Section 195 costs can traditionally be expensed up to $5,000. Amounts beyond this limitation must be amortized. However, thanks to recent changes starting in 2010 tax year the allowable expense has increased to $10,000.

Qualified real property expensing

For the first time, certain real property can be expensed under code section 179.





First I will list items that will apply, then I will list specific items that do not apply, then I will talk about further limitations.





So to start out, types of property that definitely apply include:


1. Qualified leasehold improvement property


2. Qualified restaurant property.


3. Qualified retail improvement property





Types of property that do not apply include lodging property.





Further limitations apply to the deductibility of 179 deprecation of real property. One such example is that no amounts may be deducted in a year after 2010, so you must use your deduction in 2010, then depreciate the remaining property value as you would have without considering 179 depreciation, after the 2010 tax year (similar calculation as using section 168(k) bonus depreciation).

Section 179 Deduction increased for 2010 & 2011

Thanks to the small business jobs bill, key business deductions have been extended through 2010. One of which is the section 179 deduction. For 2010 and 2011, section 179 depreciation has been increased to a maximum allowable $500,000 per business per year (limited to the extent of income). This bill also increased the beginning phase-out of property placed in service limitation to $2,000,000.

Exempt Organizations: Due Dates for timely filing returns and related penalties

As readers of previous posts would know, normally I don't spend a lot of time focusing on tax exempt organizations, in this blog. But due to the number of inquiries I have recently received, I thought it would be a good time to revisit a common type of tax filing.



Tax exempt organizations are required to file their annual return by the 15th day of the fifth month after the close of their return year. Or in plain language, if your tax exempt organization has a calendar year and closes its books on December 31, 20XX. A timely return should be postmarked or filed by May 15th of the following year. There are two three month extensions that tax exempt organizations can apply for at their discretion.



Penalties for non-filing can be very steep.

Penalties for organizations with gross receipts under $1,000,000 are $20 per day with a maximum penalty of the lesser of $10,000 or 5% of gross receipts for the year. This penalty also applies if the filing information is incomplete.



Penalties for tax exempt organizations whose gross receipts are over $1,000,000 is $100 per day with a maximum of $50,000. Keep in mind that this penalty also applies for failing to file a complete return.



Tax exempt organizations that are required to file form 990-N are generally not subject to late filing penalties.



In addition to these penalties the IRS can impose penalties on responsible parties for failure to file upon request by the IRS. Failure to timely comply with an IRS request can result in penalties of $10 per day to that person. With a maximum personal penalty of $5,000.



Of course these penalties may be abated by the IRS pursuant to their discretion if the tax exempt organization shows just cause for the filing delay.

There may be other non-monetary failure to file penalties such as losing tax exempt status, see my article regarding the small tax exempt organization filing requirements.

Small Tax Exempt Organizations

The pension protection act of 2006 enacted a myriad of tax legislation changes. One item that was lost in the fold was its affect on Small Tax Exempt Organizations. Small tax exempt organizations are those with annual gross receipts of normally $25,000 or less.



This legislation effectively required all tax exempt organizations to file returns in order to keep their tax exempt status (prior to this legislation small charities were not required to file). In order to keep tax exempt status a small tax exempt organization must have filed at least one return in the last three years.



The legislation also created a new filing form for these small tax exempts known as the form 990-N ( or e-postcard). This filing form is very simple and is so easy to file, most tax exempt organizations should not have any reason to fail to file this form. However, many small tax exempt organizations that previously were not required to file have been caught in a precarious situation, if they have not filed any returns since the requirement came into effect in 2007.



There is good news for all those organizations who fall in this category. The IRS is offering a one-time "get out of jail free card" to all small tax exempt organizations that have not previously filed a required return. The IRS has said that all applicable organizations have until October 15 2010 to file required returns, and the IRS will not change their exempt status. In addition, they will not impose any non-filing penalties. It seems to be a win-win for the IRS and small tax exempt organizations.



If you believe your organization may be in danger there is a list published on the IRS website.



Click this link and it will take you to their web page.



As always consult a tax professional if you are unsure as to your specific tax situation.