If you’re a business owner in search of effective ways to reduce your taxable income, the 105-Health Reimbursement Arrangement (105-HRA) could be your golden ticket. This strategy is exceptionally beneficial for businesses that can employ a spouse as their sole employee, converting personal medical expenses into significant business tax deductions.
The 105-HRA offers a robust medical reimbursement plan, but it hinges on two primary conditions:
- Business Structure: Your business must operate as one of the following:
Sole Proprietorship (Schedule C)
Partnership (Form 1065)
Real Estate Rental (Schedule E)
Farm Business (Schedule F)
C Corporation (Form 1120) - Single Employee Requirement: This strategy works best when your only employee is your spouse, making it ideal for family-run businesses where one spouse can be designated as the employee.
How It Benefits You
Implementing a 105-HRA allows you to reimburse your employee-spouse for all medical-related expenses, including health insurance premiums and out-of-pocket costs. These reimbursements are treated as deductible business expenses, lowering your overall taxable income significantly.
Example: Consider a business owner who uses a well-structured 105-HRA to reimburse their spouse $22,000 for medical expenses, could result in tax savings exceeding $10,000 annually.
The 105-HRA not only facilitates significant tax savings by converting personal medical costs into business deductions but also enhances the financial efficiency of operating a family-run business. To ensure compliance and maximize benefits, it’s crucial to adhere to IRS guidelines and maintain meticulous records.
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