One of the smarter things I’ve done was to set up a small business. This is not a business that is specialized to any degree, it is simply a vehicle through which I conduct the various small jobs and contracts that occasionally find their way to me. This business is basically a name that I published (Doing Business As or DBA), an IRS employer ID number and a checking account. The DBA costs a few bucks; you can find out how to do this in your area by contacting the local Town Hall or Courthouse. The IRS ID number is free and can be obtained with a single phone call. The checking account will need some money to start it off, but keep it as simple as you can. Do these things and presto! You are now officially a business, a sole proprietorship to be exact.
Even if your company doesn’t make much money (and mine doesn’t), you can start to write off expenses associated with the work you do. One of the most useful write-offs I get through my company is through my Healthcare Reimbursement Arrangement (HRA).
An HRA, also known as a IRC Section 105(b) plan, is an employer plan to reimburse employees for medical costs, including medical and dental insurance, deductibles, co-pay amounts, and any other legitimate healthcare expenses.
Sole proprietors, partners in partnerships, and S corporation shareholder-employees can’t participate in HRAs. But there’s a loophole in the law: A sole proprietor’s spouse can be covered. And that coverage can include both the employee and the employee’s family. Even though the spouse-employee’s family includes the sole proprietor.
Here’s how it works: some medical cost comes up. For instance, your spouse needs to visit the dentist, and pays a co-payment, which is not deductible. You as the business owner can write a check for the amount of that co-payment and reimburse him or her for that expense. If you have a HRA in place, that reimbursement becomes a business expense that you can write off.
So if you have family health insurance, as the business owner you can write off the cost of your premiums, but not those of your spouse. The HRA changes this and allowed you to include his or her premiums and other expenses, including over-the-counter drugs and many other health-related costs that you would normally couldn’t deduct. If you keep track of your health-related expenses and use your HRA, you can save a lot at tax time. I’ve routinely saved in excess of $1,000 in taxes each year for the last several years.
There are several online services to help you set up and manage your HRA. A good service to help you set up an HRA is www.baseonline.com. I’ve used them for some time and they are a good outfit. They have good customer service and the cost of letting them set up and run the HRA is far less than what I save each year. Their web site lets you enter the expenses and reimbursements. There is a limit to how much you can claim, and different kinds of expenses carry different degrees of discount with the IRS. If you enter more than the amount allowed, at the end of the year Baseonline will optimize your list of reimbursements to maximize your discount, and then send you the necessary forms you need to include with your taxes when you file. HRAs are a great way to take some of the sting out of high health care costs.
