Great Ideas for your Small Business:
Take Advantage of a Tax Break
The old cliché, “if something sounds too good to be true, it probably is” applies to many schemes and scams offered to small business owners. However, an obscure provision of the federal tax code actually gives mom-and-pop businesses a real break.
Although it sounds too good to be true, Section 105 allows very small, family-owned businesses to reimburse them-selves for 100 percent of their uninsured medical, dental, and vision-care expenses. The regulation has been on the books since 1954, but few business people seem to know anything about it.
Those who do take advantage of Section 105 have to meet strict requirements set up by the Department of Labor and the Employee Retirement Income Security Act, known as ERISA. You also have to file the appropriate forms with your tax returns and keep careful payroll records, according to Juda Kallus, a Manhattan accountant who is familiar with Section 105. “First of all, you have to have a bona fide working relationship with your spouse,” said Kallus. “Then, the record-keeping requirements are very severe.”
Kallus says Section 105 may work for you, if
- You operate a husband-and-wife sole proprietorship or partnership.
- One spouse works for the other.
- You pay your spouse a reasonable salary.
- You withhold payroll taxes and keep careful time sheets.
- You keep a separate business banking account for reimbursements.
- The spouse on the payroll incurs the expenses and requests reimbursement from you, the business owner.
- You are willing to file the necessary paperwork with the federal government.
kallus, who has about fifteen clients using section 105, said he advised Patricia Buckley to look into Section 105 when she lost her job and began managing her husband’s photography studio a few years ago.
Buckley and her husband, Ned Matura, are typical of those who take advantage of Section 105. “I’m a full-time employee of our business,” said Buckley. “I invoice clients, write up estimates, and run the office.”
Before they heard about Section 105, Buckley said they were spending about $9,000 a year for a health insurance policy through a federal plan which allows people who have lost their jobs to pay insurance premiums on their own. It’s generally more expensive than group coverage, but better than nothing.
By switching to a cheaper, catastrophic medical insurance with a high deductible, Buckley said they save about $4,000 a year. Under Section 105, she’s now reimbursed by the business for all out-of-pocket family medical expenses.
Although any accountant can learn how to fill out all the forms, many refer clients to a company set up exclusively to administer Section 105 reimbursements for business owners. “I would not set up a plan for my clients on my own— it’s too complicated,” said Don Yoder, founder of Yoder’s Tax and Accounting Service in Kalona, Iowa.
Yoder, who prepares tax returns for scores of farmers and small business owners, lets AgriPlan/BizPlan, based in Adel, Iowa, handle all the Section 105 paperwork. In 1995, AgriPlan/BizPlan had 40,000 clients taking advantage of Section 105; in 1997, the number grew to 50,000, says president Phil Harrington.
Harrington, who joined the company in 1989, said it was founded in 1986 by Don Rashke, a Wisconsin insurance agent. Rashke, now retired, wondered why big corporations could legally deduct 100 percent of the cost of providing medical benefits, but small businesses couldn’t. He found Section 105 when he was digging around for answers. “Our clients have an average tax saving of $1,800 a year,” said Harrington. BizPlan, which relies on computers to keep the administrative costs down, charges clients a flat fee of $175 a year to handle all the necessary paperwork. BizPlan markets its services to accountants and pays them a modest referral fee of about $50 per client.
Their client base is growing, even though small business owners can now deduct 40 percent of their health care costs under the Health Coverage Availability and Affordability Act. By the year 2007, the deduction increases to 100 percent.
There is one big catch to Section 105: If you have employees, you must provide similar health care benefits to the ones you provide for your family. “You can’t discriminate; you have to offer it to everyone,” he said.