Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Premiums deductible?
Old 10-20-2012, 03:59 PM   #1
Recycles dryer sheets
 
Join Date: Oct 2005
Posts: 113
Premiums deductible?

My scenario: Wife and I have recently ER'ed, and will be buying health insurance starting next month.

I've a very small side business I've run for years, filing a schedule C, taking appropriate deductions, and showing a very small profit each year. Constant and steady income, it shouldn't change.

While employed, it provided a minuscule portion of our overall income - less than 3%. In retirement, that will jump slightly - but it will still be small, just a tad over 5%. Our primary source of income will come from pre-tax investment accounts and two decent pensions.

If our income was solely derived from self employment, I'm under the impression we could deduct health care expenses in their entirety as a business expense. On the other end of the spectrum, were we living solely on investment and pension income, we could only deduct the portion of health care related expenses beyond 7.5% of AGI. In our case, that results in no deduction as long as we stay healthy.

So, the short version of the question: Does a small side business as described above allow me to deduct any or all of our health care expenses? Were I able to deduct 100% as a business expense, the profit from the business would be near zero or a slight loss, based on current health care premiums.
__________________

__________________
Da Nag is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 10-20-2012, 04:14 PM   #2
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,428
Quote:
Originally Posted by Da Nag View Post
My scenario: Wife and I have recently ER'ed, and will be buying health insurance starting next month.

I've a very small side business I've run for years, filing a schedule C, taking appropriate deductions, and showing a very small profit each year. Constant and steady income, it shouldn't change.

While employed, it provided a minuscule portion of our overall income - less than 3%. In retirement, that will jump slightly - but it will still be small, just a tad over 5%. Our primary source of income will come from pre-tax investment accounts and two decent pensions.

If our income was solely derived from self employment, I'm under the impression we could deduct health care expenses in their entirety as a business expense. On the other end of the spectrum, were we living solely on investment and pension income, we could only deduct the portion of health care related expenses beyond 7.5% of AGI. In our case, that results in no deduction as long as we stay healthy.

So, the short version of the question: Does a small side business as described above allow me to deduct any or all of our health care expenses? Were I able to deduct 100% as a business expense, the profit from the business would be near zero or a slight loss, based on current health care premiums.
Da Nag, really two questions. First, does your business meet the requirements to obtain health care insurance. Second, if so, is the expense deductable.

Are you currently getting your insurance through this business? If not, you should immediately contact an insurance agent, who will confirm if the schedule C income is sufficient to obtain a small business policy. Most states have enrollment windows for these policies that close in November, so you don't have much time. Also, if you are currently in a group plan you have only 62 days to transfer coverage before losing continuity and being subject to exclusions.

As for deductibility, the insurance company will be more rigorous than the IRS, so if it meets insurance company requirements it can be charged as a business expense.
__________________

__________________
MichaelB is online now   Reply With Quote
Old 10-20-2012, 04:31 PM   #3
Recycles dryer sheets
 
Join Date: Oct 2005
Posts: 113
Quote:
Originally Posted by MichaelB View Post
Are you currently getting your insurance through this business?
No...I've not had to buy insurance for 20+ years, always covered through my previous employer. And, the policy I have applied for is individual + spouse. I've not paid any premiums, and it doesn't take effect until 11/1 - we're covered through my former employer until then.

So, if I'm reading your response correctly - individual policies are not deductible as a business expense, only policies purchased by the business? I've not seen mention of that elsewhere, which would certainly complicate things a bit.
__________________
Da Nag is offline   Reply With Quote
Old 10-20-2012, 05:07 PM   #4
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,428
I'm not a tax expert. For sure, the is no doubt health insurance premiums are legitimate schedule C deductions.

Normally business expenses are incurred in the name of the business, not the individual. That doesn't mean you can't incur a personal expense and then charge it as a business expense. If the insurance policy were in the name of the business there would be no doubt. As the policy is individual, if the IRS feels your business is not legit it could challenge the deduction.

So, legit business, real income, profit after expenses and deductions on your schedule C, it should probably be ok.
__________________
MichaelB is online now   Reply With Quote
Old 10-20-2012, 05:55 PM   #5
Recycles dryer sheets
 
Join Date: Aug 2009
Posts: 116
this link may be helpful.
Self-Employment Health Insurance Tax Deduction

It looks to me that some portion of your health insurance is deductible.
__________________
tjscott0 is offline   Reply With Quote
Old 10-20-2012, 06:59 PM   #6
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
Yes. If there is sufficient profit from the business. If there isn't sufficient business income then the premiums are only deductible like any other medical expense, to the extent they exceed 7.5% of your AGI.
__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Old 10-21-2012, 09:45 AM   #7
Recycles dryer sheets
fisherman's Avatar
 
Join Date: Jul 2007
Posts: 478
Please consult a CPA on the following as I might not state it accurately.

We have a small business. S Corp of which DW and I are the only employees. Over the last five plus years since I ESRd it has grown much more than we ever thought it would. We are now working almost 20 hours a week but we do pick the times and work from home. So technically we are not even ESRd anymore but we do like the business and the people we work with. The income is really good also and that has allowed the following for the last several years. We have an Individual policy for the family. Our S Corp reimburses us for the cost of the insurance as an employee benefit of which DW and I are the only ones. It really helps on the taxes. We also have an owner K at Vanguard that we do profit sharing into as well as regular 401k contributions. These two help us stay where we want to be in the tax bracket.
__________________
Worked the plan and now living the Dream!
fisherman is offline   Reply With Quote
Old 10-21-2012, 10:10 AM   #8
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
I just realized something. For those who have problems getting individual healthcare insurance because of pre-existing conditions, they could set up a business with their significant other, take say $10,000 from their savings to create an "income", and only use this income to buy group insurance for both of them. Would this be legal ?
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 10-21-2012, 10:27 AM   #9
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,088
Quote:
Originally Posted by obgyn65 View Post
I just realized something. For those who have problems getting individual healthcare insurance because of pre-existing conditions, they could set up a business with their significant other, take say $10,000 from their savings to create an "income", and only use this income to buy group insurance for both of them. Would this be legal ?
That sounds distinctly illegal. How do you legally document the income to the business when you are providing it by buying your own products or services?
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is online now   Reply With Quote
Old 10-21-2012, 10:35 AM   #10
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
A friend of mine, let's call her Sue, gives private painting lessons. She has problems getting individual healthcare insurance because of her history of breast CA. All her customers pay her cash, by the session. Sue could theoretically set up a business with her partner, they both would add say $400 a month cash from their savings into the business' bank account, they would generate an annual small "profit" but both Sue and her partner would have their pre-conditions covered. So Sue would have her breast CA history covered, correct ?

Quote:
Originally Posted by Alan View Post
That sounds distinctly illegal. How do you legally document the income to the business when you are providing it by buying your own products or services?
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 10-21-2012, 10:41 AM   #11
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
Just to confirm, I am not advising anyone to do anything illegal.

On the other hand, I also know many women in desperate situations because they cannot get individual healthcare coverage. This statement is not a political statement, it is a fact.
Quote:
Originally Posted by Alan View Post
That sounds distinctly illegal. How do you legally document the income to the business when you are providing it by buying your own products or services?
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 10-21-2012, 10:55 AM   #12
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,088
Quote:
Originally Posted by obgyn65 View Post
A friend of mine, let's call her Sue, gives private painting lessons. She has problems getting individual healthcare insurance because of her history of breast CA. All her customers pay her cash, by the session. Sue could theoretically set up a business with her partner, they both would add say $400 a month cash from their savings into the business' bank account, they would generate an annual small "profit" but both Sue and her partner would have their pre-conditions covered. So Sue would have her breast CA history covered, correct ?
The bolded sentence is mine - in the business accounts, how do you account for this as legitimate business income? What do the receipts for these payments that appear in the bank account state they are for?

It may well be legit, but it doesn't sound like it to me, although I'm not a tax expert.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is online now   Reply With Quote
Old 10-21-2012, 11:01 AM   #13
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
I would love to know for sure if this is legit or not. I am not a tax expert either, but I have always been a patient advocate and will continue to do so. If legal, this idea of setting up a small business just for healthcare coverage (even if it means using one's savings to indirectly cover pre-conditions) might be the single most important concept I have learned from this website since I joined.

Quote:
Originally Posted by Alan View Post
It may well be legit, but it doesn't sound like it to me, although I'm not a tax expert.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 10-21-2012, 11:11 AM   #14
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
Well, to answer your question, concretely I would withdraw cash from my personal account using the usual ATM (say $100 a week on average) and a few days later I would add this to what I would earn from the business and pay this into the business bank account. There are no receipts as Sue's students pay her in cash for the painting sessions. The only purpose would be for Sue to buy group healthcare insurance with her partner.

Quote:
Originally Posted by Alan View Post
- in the business accounts, how do you account for this as legitimate business income? What do the receipts for these payments that appear in the bank account state they are for?
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 10-21-2012, 12:40 PM   #15
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,088
Quote:
Originally Posted by obgyn65 View Post
There are no receipts as Sue's students pay her in cash for the painting sessions. The only purpose would be for Sue to buy group healthcare insurance with her partner.
Receiving money in cash does not remove the obligation to provide a receipt, or otherwise record the transaction, when you are running a business.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is online now   Reply With Quote
Old 10-21-2012, 01:10 PM   #16
Thinks s/he gets paid by the post
MooreBonds's Avatar
 
Join Date: Aug 2004
Location: St. Louis
Posts: 2,091
Quote:
Originally Posted by obgyn65 View Post
A friend of mine, let's call her Sue, gives private painting lessons. She has problems getting individual healthcare insurance because of her history of breast CA. All her customers pay her cash, by the session. Sue could theoretically set up a business with her partner, they both would add say $400 a month cash from their savings into the business' bank account, they would generate an annual small "profit" but both Sue and her partner would have their pre-conditions covered. So Sue would have her breast CA history covered, correct ?
You have to remember that just because someone has a business doesn't mean they are guaranteed a corporate health insurance policy.

Every business goes through underwriting - if one company has a year with many health insurance claims, its policy will likely have a high increase next year. That's why you have to still fill out the medical history for every applicant in a corporate policy as if you were an individual applying for an individual policy - the health insurance underwriter will grade the group as a whole, based on the ages and previous health history/claims.

And if the 'group policy' has one paying member, they will likely underwrite her like any other group policy. She MIGHT have a slightly easier time finding a group policy with one employee versus an individual policy (especially if there are local area chambers of commerce that help small companies/self-employed consultants join their RCGA group policy), but they could still charge her through the roof on a corporate group policy, depending on her medical history.

As far as declaring you are self-employed as a painting instructor, if you have bonafide clients and follow the IRS definitions and descriptions for being self employed, then I don't see how the IRS could legally challenge that on a general conceptual basis as long as she pays the appropriate taxes and can prove it's not a hobby. (just like how Trombone-Al played a few music gigs and had very little net taxable income...but was able to show that it was a true 'side business' and not a 'hobby')

The IRS is more prone to audit cash-only businesses, although I'd imagine they will be more apt to pick, say, a lawn services business showing $50,000 in cash receipts instead of a painting tutor claiming $2,000 in receipts due to the potential magnitude for under-reporting.

If someone (IRS, insurance company) were to uncover an attempt to create a sham company solely in order to obtain a group health insurance policy, then there could be legal ramifications in doing so. What exactly the legal basis or fallout would be, I don't know - but if there were substantial claims made on the insurance policy and it was later found out that the 'business' wasn't legitimate and was only a front to obtain a group health insurance policy, the health insurer could possibly have legal recourse for retroactively canceling the policy and suing for a return of reimbursements (plus legal fees, and possibly punitive fees).
__________________
Dryer sheets Schmyer sheets
MooreBonds is offline   Reply With Quote
Old 10-21-2012, 02:23 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,382
Quote:
Originally Posted by obgyn65 View Post
Well, to answer your question, concretely I would withdraw cash from my personal account using the usual ATM (say $100 a week on average) and a few days later I would add this to what I would earn from the business and pay this into the business bank account. There are no receipts as Sue's students pay her in cash for the painting sessions. The only purpose would be for Sue to buy group healthcare insurance with her partner.
This smells like fraud. One's attitude toward risk taking of this type varies, but I would imagine that as a doctor you might have some exposure if you help people cook up these schemes.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 10-21-2012, 06:34 PM   #18
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
As mentioned above, I would not advise anyone to do anything illegal or unethical. However, I have patients at free clinics in rather desperate situations, and if there is a legal way to help them find a way to get proper coverage, I would not hesitate to let them know.
Quote:
Originally Posted by haha
This smells like fraud. One's attitude toward risk taking of this type varies, but I would imagine that as a doctor you might have some exposure if you help people cook up these schemes.

Ha
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 10-21-2012, 06:46 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,382
Quote:
Originally Posted by obgyn65 View Post
As mentioned above, I would not advise anyone to do anything illegal or unethical. However, I have patients at free clinics in rather desperate situations, and if there is a legal way to help them find a way to get proper coverage, I would not hesitate to let them know.
You are a very good person, no doubt about that. But before you give any tax advice, I suggest spending a few of those doctor dollars with an accountant. You wouldn't want your advisees to wind up incarcerated, no matter how worthy they and their plights might be. Although, come to think of it, that just might take care of their medical needs.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 10-21-2012, 09:21 PM   #20
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
Quote:
Originally Posted by obgyn65 View Post
I would love to know for sure if this is legit or not. I am not a tax expert either, but I have always been a patient advocate and will continue to do so. If legal, this idea of setting up a small business just for healthcare coverage (even if it means using one's savings to indirectly cover pre-conditions) might be the single most important concept I have learned from this website since I joined.
Is employer group health insurance available to sole proprietors?

Some states define a small employer group as those that have 1-50 employees, but most states require companies to have at least two employees to qualify for group coverage. Insurance companies and the individual states often have specific and strict requirements for very small employer groups to document that they actually are legitimate businesses and have the appropriate number of eligible employees to prevent fraud. Employers generally have to provide payroll tax documentation validating who is an employee.
The states that allow sole proprietors to purchase group coverage are often referred to as states that guarantee coverage for "business groups of one." In some of these states, business groups of one are treated in the same manner as larger employer groups. In others, they are treated as their own distinct pool and rated separately by the health insurance companies. In the states that do not allow for sole proprietors to purchase group coverage, these business owners often purchase individual health insurance coverage. For information about whether or not your state allows for group insurance to be sold to business groups of one, see NAHU's Health Care Coverage Options Database.



(This is from the national association of health underwriters)
NAHU - Consumer Information - Consumer Guide To Group Health Insurance
__________________

__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 09:17 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.