The old cliche “if something sounds too good to be true, it probably is” applies to many schemes and scams offered to small-business owners.
There’s actually an obscure provision of the federal tax code that gives mom-and-pop businesses a real break, though. Although it sounds too good to be true, Section 105 allows very small, family-owned businesses to reimburse themselves for 100 percent of their noninsured 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, said Juda Kallus, a Manhattan accountant familiar with Section 105.
“First of all, you have to have a bona fide working relationship with your spouse,” Kallus said. “Then, the record-keeping requirements are very severe.”
Kallus, who has about 15 clients using Section 105, said he advised Patricia Buckley to look into it when she lost her job and began managing her husband’s photography studio about three years ago.
Buckley and her husband, Ned Matura, are typical of those who take advantage of the provision.
“I’m a full-time employee of our business,” Buckley said. “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 that allows people who have lost their jobs to pay insurance premiums on their own.
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 in Adel, Iowa, handle all the Section 105 paperwork.
AgriPlan/Biz Plan President Phil Harrington said company founder Don 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,” he said. BizPlan, charges clients a flat fee of $175 a year to handle paperwork.
Its client base is growing even though small-business owners can now deduct 30 percent of their health care costs under the Health Coverage Availability and Affordability Act.the year 2006, the deduction increases to 80 percent.
BizPlan markets its services to accountants and pays them a modest referral fee of about $50 per client.
Tips on Section 105
New York accountant Juda 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.
Spouse is paid 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.
There’s still time to take advantage of Section 105 if you qualify and pay your spouse before Dec. 31. For more information, contact your accountant or BizPlan at (800) 298-2923.
The following fields overflowed: CREDIT = Jane Applegate Los Angeles Times