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The MERP Small Business Tax Strategy

 

from TaxCoach™ Briefs
Volume 1, Number 2 — June 8, 2006
by Edward A. Lyon, JD
The small business tax strategy encompassing the Section 105 medical expense reimbursement plan (MERP) is one of TaxCoach's most powerful and popular tools. Typically, this involves a sole proprietor hiring his or her spouse, paying them in the form of medical benefits, and deducting the family's medical expenses from the business return. This avoids the usual 7.5% floor for deducting medical expenses on Schedule A and avoids self-employment tax on reimbursements. (The plan is also available for businesses taxed as partnerships or "C" corporations.)

On February 14, the Tax Court issued a decision in a case involving an unincorporated daycare provider who hired her husband and deducted $7,818 in 2000 and 2001 (Speltz v. Commissioner, T.C. Summary Opinion 2006-25). The Tax Court found that a bona fide employer-employee relationship existed and the couple could legitimately deduct those expenses. The Speltz decision offers a detailed roadmap for establishing and implementing a MERP.

We have rewritten our MERP template to simplify it for use as a small business tax strategy with "hire your spouse" clients. (You'll find it in the "Forms and Templates" section of the TaxCoach site.) We've also added complete "due diligence" materials to the 105 Implementation Kit in the same section. These include:

  • IRC Section 105(b)
  • Regs. Section 1.105-11
  • Rev. Rul. 71-588
  • PLR 9409006
  • Coordinated Issue Paper, "Health Insurance Deductibility for Self-Employed Individuals"
  • Speltz v. Commissioner, T.C. Summary Opinion 2006-25

We're confident you'll find the new implementation guide a helpful resource for implementing this strategy for your small business and self-employed clients.

Click here to learn more about small business tax strategy from TaxCoach™.

 

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