TaxCoach Briefs:    May 8, 2008

Volume 3, Number 19

• Spotlight on Strategy: There's Something About MERP
• TaxCoach Recommends: 7 Dirty Secrets
• Subscriber Event: Not Him, But Everybody Else
• TaxCoach "Spring Training": Boot Camp Update
• Subscriber Q & A: Where is the Outlook Letter?

****Attention All-Stars****: Our next teleseminar will be Tuesday, May 13, at 4PM EDT. We'll be discussing the philosophies and methods of target marketing, and we'll put our friend Lisa Johnson of Mobile, AL on the Hot Seat, to discuss how she's been expanding her practice. You'll find more information and an agenda on the TaxCoach All-Stars page.

****Attention TaxCoach Subscribers****: The next issue of the new TaxCoach Lineup will hit the post office next week. Make sure your address is up to date in TaxCoach so you don't miss a single issue!

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SPOTLIGHT ON STRATEGY (EAL)
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THERE'S SOMETHING ABOUT MERP

The TaxCoach system outlines dozens of concepts and strategies you can use to cut your clients' taxes. The most popular, by far, is the Section 105 Medical Expense Reimbursement Plan, or MERP.

Typically, these plans involve a self-employed client hiring their spouse, and establishing a plan to compensate that spouse by reimbursing them for the family's uninsured medical costs. The beauty of this strategy is that these can include:

• All forms of health insurance, including major medical coverage, supplemental coverage, long-term care, and even Medicare supplemental ("medigap") premiums
• Co-pays, deductibles, and prescriptions
• Vision care, dental care, and chiropractic care
• Big-ticket items like orthodontics, fertility treatments, and LASIK surgery
• Even nonprescription medicines and health-care supplies

If you can show your clients how to write off those costs as business expenses, you're a hero! And with April 15 behind us, now is a great time to spread the word. So we thought we'd use the occasion to discuss the plan in a bit more depth.

Keith and I love the MERP, and we both use it for our own families. But Code Section 105, which authorizes the strategy, includes some hoops to jump through. Specifically, you have to establish the plan for the benefit of "employees." And this requirement leads to more subscriber questions than any other TaxCoach strategy. This one, from an affiliate in Texas, is typical:

In your Medical Expense Reimbursement Plan section you state, "If you operate as an S corporation, you and your spouse are both considered self-employed. (In that case, segregate part of your income through a proprietorship or C corporation and pay benefits through that entity.)". If you do this is it true that both entities would be considered "affiliate groups" and then the MERP would have to cover all the employees of the S-Corporation as well as your spouse in the other entity or is there a way around this?

So, first -- who qualifies as an "employee"?

• If your business is taxed as a proprietorship, you're considered "self-employed" and not eligible to receive benefits yourself. (If you're married, you can hire your spouse and pay benefits through them, so long as you document your spouse's work and reimbursements properly and the reimbursements constitute "reasonable compensation" for the work your spouse performs. You can even pay them in benefits only, rather than cash, to avoid managing payroll formalities!)


• If your business is taxed as a partnership, you're also considered "self-employed" and not eligible to receive benefits yourself. (If you're married, you can hire your spouse under the same rules as for a proprietorship, so long as they own less than 10% of the entity, and pay benefits through them.)
• If your business is taxed as an S-corp, you and your spouse are both considered self-employed. (Hiring your spouse to work for the S-corp won't work. In this case, you might consider diverting some of your income from the S-corp to a proprietorship, and hiring your spouse to work for the proprietorship.)
• If your business is taxed as a C-corp -- or you can establish a new C-corp to manage alongside your proprietorship, partnership, or S-corp -- you're in luck! You're treated like any other employee, so you can establish a plan just for yourself!

The Section 105 plan also imposes specific nondiscrimination rules. You can't just cover yourself or your family. You have to cover all qualified employees. (You can exclude those under age 25, those who work less than 35 hours per week, those who work less than nine months per year, and those who have worked for you for less than three years. But if you include those provisions, you have to apply them to family as well.) And if you operate more than one business, you may be subject to the "controlled group" and "affiliated service organization" rules. These rules force clients considering 105 plans to balance the benefits to themselves against the cost of including nonfamily employees.

As for our Texas affiliate's question, we recommend segregating a stream of income to use as a basis for 105 plan reimbursement in cases where the client operates their primary business as an S-corp. That gets around the rules that explicitly define shareholders (2%+) and their spouses as "self-employed." Directing part of the couple’s income through a proprietorship lets the spouse establishing that proprietorship hire the other, and thereby qualify as an “employee.”

Note also that "segregating an income stream" does not mean an arbitrary fractionalization of a business's total revenue. A legitimate segregation targets a distinct source of revenue and breaks it out into its own entity, so that it can be managed separately as a subsidiary. An example would be a utilities contractor who isolates his parts business from his service business.

Of course, MERP benefits are governed by the same “controlled group” and “affiliated service organization” rules that apply to pension plans.

So our affiliate is correct that segregating an income stream will generally NOT let clients establish 105 plans for themselves AND simultaneously exclude employees (unless they can exclude those employees under other provisions of Section 105).

Thus, the point of segregating an income stream is to qualify an S-Corp shareholder as an "employee" – but NOT to “carve out” a benefit just for them at the expense of other employees. Even so, the advantages of the plan are significant.

In short, don't let confusion over qualification keep you from showing your clients such a valuable bit of proactive planning. Health care costs are climbing almost as fast as gas prices, and the U.S. Chamber of Commerce reports that rising healthcare costs have replaced taxes as small business's #1 concern. Introducing clients to the MERP may be the single most effective way to grow your business this summer.

Your TaxCoach subscription licenses a complete implementation guide with plan template, enrollment and reimbursement forms, and legal guidance from the Tax Code, Treasury regulations, IRS, and Tax Court. If you're not already a subscriber, click here for complete details.

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TAXCOACH RECOMMENDS (EAL)
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7 DIRTY SECRETS TO 2-3 NEW CLIENTS PER WEEK

Keith and I are always looking for new marketing concepts and strategies. Sometimes we provide the content to you ourselves, and other times we introduce outside partners. The goal in both cases is to bring you the most valuable tools for building a planning-based business.

Now we're pleased to bring back Ralf Reimberg from Business Made EZ. Ralf offers a wealth of information on building and managing a profitable accounting business. Last December, I attended his "Quick-Start" program for new clients, and was impressed with the qualifty of the program and participants.

Tuesday, May 13, at 1PM EST, we'll be hosting Ralf's teleseminar, "7 Dirty Secrets to Bringing in 2-3 New Clients Per Week." I'm confident you'll profit from the discussion. Here's a brief peek at the agenda:

• Quick, simple and economical ideas to increase your income - now
• How to use a messaging center to have a steady stream of new clients calling you every morning
• 3 secrets to capture hidden revenue sitting under your nose
• How to increase office efficiency by at least 40%
• At last, someone has unlocked the secrets of getting clients to fall in love with you -- while paying you at the same time
• How to get paid for that nagging nuisance work off-season while increasing your bottom line
• Generate enough income each month to pay your bills, and never worry about cash flow again

Click here to reserve your seat!

Hurry, because this is a free seminar! Limited phone lines are available. Phone # and access code for this special teleconference will be given out to registered attendees only! If this teleconference fills up, you'll be notified and added to the waiting list.

Thank you for all your information and the example you set for us to aspire to. I wish I'd known about you before I signed up with a national company last year. I believe I would have been much better off financially (spending less and earning more) and personally better (control of what is going on in my firm as well as with my clients).

Mike Lawrence, CPA

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SUBSCRIBER EVENT (KAV)
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NOT HIM, BUT EVERYBODY ELSE

In the last couple of issues, Ed and I invited any subscribers nearby to join us for the Reds' Business Day Special yesterday afternoon against the Cubs. We dangled Ken Griffey Jr's potential 600th home run as an added bonus.

Well, it didn't happen for Junior, but -- it did for most of the rest of the team! Previously struggling Reds batters smacked a total of seven home runs in the game, and trounced the Cubbies -- who we always root for except when we're playing them -- 9-0.

It was a small group -- we'd talked to several folks already committed to post-tax-season vacations, conferences, and even surgeries. But we had a good time despite the late rain, and a lot of great discussion. I can tell the Boot Camp in June is going to be amazing!

As for the day games, we'll certainly be doing it again. One of our All-Stars from Houston will even be joining us in July. So if you're going to be in or near the Cincinnati area, let us know. Nothing like an excuse to go to the ball park!

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TAXCOACH "SPRING TRAINING" (KAV)
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BOOT CAMP UPDATE!

Registrations continue to arrive for the first-ever "TaxCoach Spring Training 2008" boot camp here in Cincinnati this June 20-22 -- actually, faster than we expected. We met today with our event coordinator to request a bigger room. If it turns out that one's not available, we'll be at capacity within a week or two. So don't wait too long if you're thinking about attending! The group includes our oldest subscriber (who joined TaxCoach on July 9, 2005) and our newest (who joined at earlier today).

Subscribers, you should have received an updated invitation with your first TaxCoach Lineup, within the last week. If you're not a subscriber, click here to learn more about the Boot Camp.

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SUBSCRIBER Q & A (KAV)
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After we introduced the revised text on the Outlook Letter last week, we got several inquiries about how to use it. Here's a good example. A standard long-winded answer from me, but hey, I never know how much info folks will need!

Q: Where is the report section for downloading the Tax Outlook letter? I am new, so I am not sure where to go. Thank you.

A: To get to the Reports screen, you just need to add a new client, or select an existing one. On the Home Page, once you sign in to TaxCoach, you can add or select a client from the green "Client Tools" area on the right.

When a client is selected, you'll see a column of buttons on the right side of the Home Page, one for each detail screen. The bottom button takes you to the Reports screen. Or, if you're adding or updating a client within the detail screens, you'll see a row of tabs across the top - again, one for each detail screen. The Reports tab is on the right.

Once you're on the Reports screen, the Outlook Letter is the third orange action button on the right. Just like with the main report (the detail tax plan) and the plan summary, the contents of the Outlook Letter depend on the strategy modules selected for the current client. That way, extraneous items that don't apply to the client aren't included.

Hope that clears it up - please feel free to ask if you have further questions.

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We're happy to answer your questions on TaxCoach content, features, marketing, or general taxation. While we give first priority to our TaxCoach All-Stars, we work to answer all questions. For best response, email support@taxcoachsoftware.com. If we can't answer immediately, or we think the answer will be useful to all of our subscribers, we'll publish it (anonymously) here in the 'Subscriber Q & A' section of TaxCoach Briefs.

Regards,

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(513) 321-2820

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