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Where can I read about authorized tax deductions?

By: Rick Gossett

 

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Where can I read about authorized tax deductions?

 

Answer: There is a long list of authorized tax deductions for self-employed business owners that we can discuss before referencing you to further information on the subject. Self-employed health benefits: Self-employed business owners (i.e. sole proprietors, partners, shareholder-employees of S corps, and LLC members) generally cannot deduct the cost of their medical insurance or medical and dental expenses, including those paid for family members, as a business expense. However, provided all of the IRS qualifications for claiming the self-employed health insurance deduction are met, self-employed business owners can generally deduct 100% of the cost of their medical insurance premiums, including coverage for their spouse and dependents, as an adjustment to gross income on their personal tax return, Form 1040. You can review IRS information on the Self-Employed Health Insurance deduction at:

Self-employed business owners deduct their out-of-pocket medical and dental expenses not covered by insurance, including those paid for family members as itemized medical and dental expense deductions subject to the 7.5% adjusted gross income threshold on Schedule A of their Forms 1040.  You can review IRS information on deductible medical and dental expenses at the following website:

However, one alternative that you may want to consider is a Section 105 HRA or medical reimbursement plan, which is one type of benefit plan that is popular with self-employed business owners. A Section 105 medical reimbursement plan is any plan or arrangement established in accordance with Internal Revenue Code Section 105 under which an employer reimburses an employee for uninsured health or accident expenses incurred by the employee or their dependents. Section 105 allows a 100% deduction for health insurance premiums and even allows companies to write off other non-insured medical, dental and vision expenses as well. Employees, including owner-employees, must draw a regular W-2 salary or wages from the business in order to qualify as employees under the IRS rules, but in most situations employers and employees can save Federal, State and Local income taxes, FICA (Social Security and Medicare) taxes, workers’ compensation, unemployment taxes, and state disability insurance (where applicable) payroll taxes with a Section 105 plan.

Due to the IRS limitations on health insurance and other medical expense deductions for the self-employed, a self-employed business owner who can legitimately employ his or her spouse as a W-2 employee and provide him or her with health insurance coverage through the business, which includes dependent coverage for the owner and other family members, will find a Section 105 plan particularly appealing. However, it is important to note that 2% or more S corp shareholder-employees generally cannot participant in a Section 105 plan, and if they do, any benefits provided under the plan to the shareholder-employee and his or her spouse and dependents must be included in the owner-employee’s W-2 compensation as taxable wages. While you can review information on Section 105 plans, your tax advisor, a local health insurance broker or agent or a Section 105 plan sponsor, like one of those found at the websites included below, can help you determine if a Section 105 plan is a viable alternative in your circumstances.

Business expense deductions: While you may find lists of potential business expense deductions through various sources, there is no all-inclusive list of business expenses that small or home-based businesses may deduct.  Business expenses can vary depend on a business’ particular operations, so not every business, regardless of how it is structured, will incur every conceivable tax deductible expense. Basically, when it comes to identifying and maximizing business expense deductions there are no short cuts. Business owners, regardless of how their businesses are structured, need to familiarize themselves with the IRS and state tax rules that apply to the deductibility of the specific types of business expenses their businesses normally or potentially may incur. This can be done by reviewing IRS and related business expense deduction information, like that provided below, and then consulting with a local tax advisor when uncertain about the tax deductibility of certain expenses.

While business expenses vary somewhat depending on the business operations, structure, and accounting method, under IRS rules a business, including a home-based business, can generally deduct business expenses provided they are connected with or pertain to the business and are both ordinary and necessary. According to IRS guidelines, “an ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.” While many business expenses can be deducted as you incur them, amounts incurred for purchases of vehicles, business equipment, and buildings with a useful life of more than a year must be capitalized and the cost recovered over time through depreciation deductions. When the sale or production of merchandise is a material income producing factor in the business, inventories must be maintained and the inventory costs capitalized and deducted as Costs of Goods Sold. Also, certain business start-up expenses must be capitalized, but can be deducted over time through amortization deductions.
You can review IRS and related discussions on business expenses at the following websites:
General business deduction discussions:

Depreciation expense (including Section 179 expense):

Home office:

Startup issues:

Retirement plans:

To help you identify, thoroughly evaluate, and maximize your business expense deductions and ensure compliance with IRS rules and regulations, we recommend that you review your particular circumstances with your local tax advisor or CPA.

Published: September 19, 2013
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Rick Gossett

As COO of Tarkenton Companies for more than 20 years, Rick has been responsible for business software development, unique partnerships, business educational content and consulting, and more. Rick was the originator of Tarkenton Companies’s consulting service and initially handled all of the questions himself. Prior to joining Tarkenton Companies, Rick owned and operated a private practice as a CPA. Prior to that, he was a Senior Manager at Pannell Kerr Forster in tax and audit, as well as Principal in Ernst & Young's small business advisory group.

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