JoAnn Laing's Blog - All About Small Business

While often difficult to understand, company healthcare costs can sometimes become a source of tax reduction. Here is some information to help you understand when you can and cannot deduct health care premiums and medical expenses.

It is best to consult a professional advisor to determine how your particular situation can be best integrated into your tax regimen. 

Health care costs can be substantial, but it is possible to find some relief in the tax code. Insurance premiums and many medical expenses may be tax-deductible, provided they meet certain criteria.  Managing your health expenses can help you reach your company’s financial goals. 

Here are some things to know about health insurance and taxes:   

When health insurance premiums are tax-deductible 

While most individuals are not eligible to deduct health insurance premiums from their taxes, there are some circumstances to be aware of if you pay for premiums with after-tax dollars. For small business owners or self-employed individuals, there may be different rules that apply. For example, self-employed individuals can often deduct their health insurance premiums directly from their taxable income without having to itemize deductions, provided they report a net profit for the year and are not eligible for any other employer-subsidized health plans. 

• If you get insurance in the Health Insurance Marketplace:You can deduct the full cost of your health care premiums from your taxable income, even if you do not itemize your taxes. However, there are two exceptions to this rule: 
  •  If you can get health coverage through a spouse’s plan but choose to go through the health insurance marketplace instead, you are not allowed to deduct the premiums from your taxable income.
  •  If you do qualify for a premium deduction, any discounts or tax credits you receive through the public marketplace reduce the amount you can deduct from your taxes. 
• If you have health insurance through an employer-sponsored plan: While you cannot deduct your monthly premiums, you can deduct out-of-pocket premiums, provided you do not use an HSA to cover those costs. This applies only if you itemize deductions and if your total medical expenses exceed 7.5% of your adjusted gross income for the year. For most people, the amount they pay for their premiums does not meet that threshold.
• If you have health insurance through COBRA: Because you pay the premiums for insurance obtained under COBRA out of your own pocket, these health insurance premiums are also tax-deductible. As with employer-sponsored insurance, however, you can only claim the deduction if you itemize, and only if your total medical expenses exceed 7.5% of your adjusted gross income for the year. If you use HSA funds to pay for COBRA premiums or expenses, these are also not eligible for a deduction. 

Tax benefits of an HSA 

HSAs are the only investment vehicle that offers a triple tax advantage: contributions are tax-deductible, growth is tax-deferred, and withdrawals are tax-free, if they are used on qualified medical expenses. 

Key tax benefits include: 

• Any contributions made by you (or someone other than your employer) are fully deductible from your federal income taxes, even if you do not itemize your deductions. 
• Any contributions to an HSA made by your employer — including contributions made through a cafeteria plan — will be excluded from your taxable income. 
• The interest or other earnings on the assets in the account are tax-free, as are distributions, provided they go to pay for qualified medical expenses. 

Because you own your HSA, and because there are no required minimum distributions (RMDs), your account can continue spend the funds.to grow tax-free until you choose to spend the funds. 

A couple of notes: I was an early pioneer and advocate of HSAs at a time when there were 144,000 rollover medical savings accounts (MSAs); today, there are over 38 million accounts in the U.S. You must have a qualified high-deductible insurance plan before you set-up and contribute to an HSA. As a small business owner, you can offer HSAs to your employees by partnering with a provider that specializes in managing these accounts and integrating them into your benefits package. This can be a valuable addition to your overall compensation strategy. 

When you can deduct medical expenses 

Many medical expenses are deductible; however, to be eligible to claim the deduction, you will need to both itemize your taxes and spend a significant portion of your income on health care costs. Plus, you will need to have paid these medical expenses out of pocket (after-tax), not through an HSA (pre-tax). 

To qualify for the medical deduction, your unreimbursed medical and/or dental expenses need to exceed 7.5% of your adjusted gross income (AGI) for the year, and you can only deduct those expenses that exceed the 7.5%. 

Generally, most Americans do not meet this 7.5% threshold. However, if you have had a significant health event, a chronic health condition, or a condition with unusually high medical needs, it is worth exploring whether you qualify for this deduction. 

Deductible medical expenses include, but are not limited to: 

• Preventive care 
• Mental health services 
• Dental and vision insurance premiums 
• Long-term care insurance premiums 
• Travel and lodging for medical appointments in certain circumstances 

Please see the IRS Publication 502 for a list of all medical expenses that qualify. Common deductible expenses for small business owners include premiums for dental and vision insurance, long-term care insurance, and preventive care services. It is important to note that deductibility may depend on meeting specific criteria, such as the 7.5% of AGI rule. 

Timing is important to keep in mind: To deduct these expenses, it is important to know when the medical bill is paid, not when the medical procedure or service was performed. For example, if you undergo surgery in this year, 2025 but do not pay the bill until the beginning of 2026, those expenses will be eligible for deduction in the 2026 tax year, not 2025. 

Further “bunching or grouping” itemizable medical deductions with a single year may yield a bigger tax benefit. While many medical events cannot be planned ahead of time, certain elective procedures can be. If you are expecting higher spending on medical expenses, consider timing procedures and paying the bill, within a single tax year. It may allow you to obtain maximum impact by itemizing your deductible expenses in certain years, while in other years, taking the standard deduction. 

Above are some thoughts for understanding the tax implications of your health care spending, as it is a key element of your overall financial strategy. To take immediate action, consider these next steps: review this year’s medical expenses to identify opportunities for deductions, and evaluate whether you can meet the 7.5% adjusted gross income threshold for medical expense deductions when you file this year’s tax forms. Additionally, consult a tax advisor to explore group plans or the feasibility of timing elective procedures within a single tax year to maximize deductions. For further insights, it is always beneficial to consult a financial and/or tax expert. 

AI is changing work for many businesses, often saving time and cost, while also delivering better outcomes.

Yet, according to multiple studies, the primary factors hindering AI adoption are concerns about inaccuracy and data security.

Inaccuracy – to address, look for sources of data, and read/check everything.

Image by Data Science Dojo

Data security – opt out of your data being used for learning; also, check your data security measures regularly.

There are other elements as well, you should be aware of and keep in mind as you move forward with AI.

Mind the gaps to manage AI implementation

Responsibility – the potential gap between developers, application builders, and end users of AI models. Determine who is responsible for the model’s accuracy and possible harms.

Principles – businesses may enact responsible AI principles, but the teams building and deploying AI offerings often struggle to operationalize them. Ensure the teams building Ai applications have visibility into the data used to train models, have detailed information on and deploy how it may perform.

Goals – business goals need to be aligned; otherwise, gaps occur and anticipated results do not occur. First, make sure everyone is clear and aligned on why AI is being used in the first place: human augmentation or automation, operational efficiency or revenue growth, improved over human accuracy or lower cost, and other business goals. Also consider the role environmental sustainability plays in your business decisions.

Further, consider your own potential gaps:

Knowledge – not just your business knowledge, but that specifically of AI and what it can do for your business.

Patience – the initial result, even multiple iterations, often do not produce the desired outcome. You need to be patient and be more specific when you ask for clarification and provide more detailed information as a basis for going forward.

Remember, AI is not a substitute for human judgment.  With AI, it is possible to check more sources and survey larger data pools. But it takes a human in the driver’s seat to decide what to look at, which information to include, and to check the accuracy of the output.

There is a need for AI within businesses.  AI is affecting how firms think about career paths within their businesses. Already, there are reports of entry level jobs drying up, being done by AI. Ai expertise is increasingly important to how businesses operate, yet it is often difficult to attract “non-qualified” technical experts.

Please share other gaps you have identified and how AI has affected your business.

Small business leaders seldom think their enterprise can operate without them. Most never consider what must be done to ensure smooth continuity when a small business founder and/or owner becomes incapacitated   it can significantly affect the business, often leading to operational disruptions, financial strain, and more. But, having a plan in place, such as designating someone to manage the business, preparing necessary documentation, and considering insurance options, should mitigate these challenges.

Impact on the Business: The incapacitation of the  founder/owner can have a devastating impact, especially without a contingency plan.

Potential consequences include:

·   Operational disruptions: If the business founder and/or owner is incapacitated due to a serious accident, illness, or other debilitating reason, critical tasks and decision making may be left undone, disrupting daily operations, leading to delays, missed deadlines, frustrated clients and lost business.

·   Financial strain: The founder’s and/or owner’s incapacitation can create financial pressure, especially if they are the primary income source.

·   Loss of institutional knowledge: The founder and/or owner often holds critical knowledge about the business, its customers, and processes that may be lost without proper documentation.

·   Employee Loss: The resulting instability of the business can cause key, valuable employees to leave and make it difficult to attract new talent.

·   Succession disputes and loss of control: If there’s no clear succession plan, internal conflicts regarding leadership can arise, further destabilizing the business.  The business could be at risk of mismanagement or even closure.

Mitigate the Risks: Plan for incapacitation.

• Succession Planning, temporary or longer-term: Identify a trusted individual (family member, employee, or trusted friend) who can step in to manage the business during the founder’s and/or owner’s absence. This person should be granted the necessary authority to make decisions, plus have access to financial and operational information.
• Legal agreements: Formalize agreements with the designated individual, outlining their responsibilities and authority, plus compensation.
• Power of attorney: Consider granting a power of attorney for business matters to ensure seamless handling of financial operations and other key aspects of the business. Without proper planning, a court may need to appoint a conservator to manage the owner’s affairs and the business, potentially leading to delays and loss of privacy.

·   Corporate documents: Regularly update corporate documents (e.g., articles of incorporation, bylaws) to reflect current business structure and ownership arrangements.

·   Buy-sell agreements: For businesses with multiple owners, a buy-sell agreement is essential to manage transitions in the event of an owner’s incapacitation or death.

·   Develop a contingency plan: Create a written plan detailing how the business will operate in the founder’s and/or owner’s absence, including who will manage daily operations, finances, and client relationships.

·   Seek financial and legal advice: Consult with a financial advisor and legal counsel to ensure the contingency plan aligns with the founder’s and/or owner’s wishes and legal requirements, plus are strategies are tailored to the specific circumstances of the business as well as its founder and/or owner.

·   Financial management: Ensure there’s a plan for managing the business’s finances and securing sufficient funds to continue operations, including payroll and debt payments.  Set aside an emergency fund to cover an increase in expenses and/or potential loss of income during incapacitation.

·   Document key processes, client information, and financial details: Record crucial business processes and procedures as well as critical client and financial information to ensure continuity of operations, even without the founder’s and/or owner’s direct involvement.

·   Communication: Establish a communication plan to inform employees, clients, and other relevant parties about the situation, provide updates on business status, manage expectations and potential impacts, and expected timeline for return of the founder and/or owner.

·   Get disability insurance: Review existing insurance policies, including disability coverage, Disability insurance can provide a portion of the owner’s income during a period of illness, which helps alleviate personal and business financial strain, offset potential financial losses.

·   Consider key-person disability insurance: This type of coverage benefits the business, safeguards the business financially, if the founder and/or owner or other key employee becomes disabled.

·   Explore federal and state assistance programs: Programs like state-mandated disability insurance programs or Social Security Disability Insurance (SSDI) may provide some financial support.

Addressing Challenges in times of uncertainty.

·   Build a support network: Don’t go it alone, and don’t hesitate to ask for help from trusted friends, family members, or professional advisors.  Develop relationships with industry peers, freelancers, and mentors who can offer assistance, encouragement, and guidance during a crisis.

·   Seek expert advice: Consult with medical professionals, as well as financial and legal advisors, for guidance and support.

·   Automate and outsource: Leverage technology to automate routine tasks and outsource non-essential business functions to free up time and resources.

·   Delegate responsibilities: Empower and train employees to take on additional responsibilities; ensure they are familiar with key processes and client interactions.

·   Prioritize health:  The founder’s and/or owner’s return to good health should be the top priority.  Returning to work too early can prolong recovery and potentially lead to further setbacks or incapacitation.  Consider seeking professional mental health support to address the emotional and psychological challenges of managing a business while incapacitated.

·   Consider the long-term: Reflect on the business’s long-term viability and make adjustments as needed.

By proactively addressing these considerations, small business founders and/or owners can better prepare for and navigate the challenges associated with unexpected incapacitation.

All images by FREEP!K