As a small business owner, you need all the financial help you can get. Deducting medical expenses can be a good way to improve your business’ financial standing, but it’s a complicated area of tax law. Here are the basics you need to know to properly deduct medical expenses.
How Medical Expense Deductions Work
In order for medical expenses to be deductible, they must exceed 10% of your annual adjusted gross income (or AGI). TurboTax gives this example: “if you have a modified adjusted gross income of $45,000 and $5,475 of medical expenses, you would multiply $45,000 by 0.10 (10 percent) to find that only expenses exceeding $4,500 can be deducted. This leaves you with a medical expense deduction of $975 (5,475 – 4,500).”
However, if you are the sole proprietor of your business and buy health insurance for yourself, your spouse, or your dependents, the cost of the premiums is deductible. Some options for providing benefits to any employees of your business are also tax deductible.
Types of Medical Expense Deductions
Generally, the following expenses go toward your total possible medical deductions:
- Preventative care.
- Treatment procedures.
- Dental treatment.
- Vision care.
- Visits to a psychologist or psychiatrist.
- Travel related to medical care.
You can also deduct prescription medications and equipment, such as eyewear prescribed by eye care professionals like those at Crowfoot Vision Center.
Any procedures that your insurance reimburses you for and any non-prescription medications or equipment (except insulin) are not deductible. Cosmetic procedures are also generally not deductible, though some procedures, like LASIK may be deductible. For a full list of deductible procedures, see the IRS’ Publication 502.
Itemizing Medical Expenses
In order to deduct your medical expenses, you must itemize them. This will require that you not take the standard deduction, so only do this if your itemized deductions benefit you more than the standard deduction would.
To itemize your deduction, file Form 1040 and attach Schedule A. Work with a tax preparation specialist or follow these steps for preparing these forms.
Business Expenses vs. Medical Expenses
As a small business owner, it can be hard to determine where the line is between business expenses and medical expenses. And it can be tempting to lean toward categorizing expenses under business because those deductions aren’t subject to the 10% rule that applies to medical expenses.
As a general rule, medical expenses “must be primarily to alleviate or prevent a physical or mental defect or illness,” while business expenses are “both ordinary and necessary” to your business.
For example, blood pressure medication cannot be deducted as a business expense, even though having a heart attack could foreseeably prevent you from working. However, expenses like supplying your business with first aid kits do qualify as business expenses. Use your best judgment, and consult with a tax professional on specific deductions.
(Definitions and examples provided by Fox Business)
As a small business owner, it is vital (and to your advantage) to file your taxes properly. If you have questions about specific parts of the process, contact a tax preparation specialist for assistance.