Health Ins Prem & Medical Reimbursement C-Corp shareholders

[joelgilb]

I have a new client that has a single owner C-Corp that is doing little if any business. In the past his prior tax preparer deducted medical expenses and health insurance on the 1120. There are no employees and no wages paid to anyone.

I was under the impression that a deduction for medical can only be taken at the corp level if they had wages and could be called employees not just shareholders.. I know in an S-Corp, the wages must be at least as much as the medical reimbursement and are considered a part of the employees wages.

How is it handled in a C-Corp. Client is adament that he should get the deduction and in past paid his corp RE developement fees to offset his medical expenses and zero his corp income.

[Maribeth]

I have a new client that has a single owner C-Corp that is doing little if any business. In the past his prior tax preparer deducted medical expenses and health insurance on the 1120. There are no employees and no wages paid to anyone.

I was under the impression that a deduction for medical can only be taken at the corp level if they had wages and could be called employees not just shareholders.. I know in an S-Corp, the wages must be at least as much as the medical reimbursement and are considered a part of the employees wages.

How is it handled in a C-Corp. Client is adament that he should get the deduction and in past paid his corp RE developement fees to offset his medical expenses and zero his corp income.

You can have a medical reimbursement plan through the company. It can cover out-of-pocket medical expenses and medical premiums of the employees, if so stated in the plan.

I believe that it is covered under IRC §105 and you must meet two tests in order for it to be a tax-free benefit to your employees. Benefits must be available to all employees and it may not discriminate against any employee group.

My above analysis is very brief and general. However, in all cases my research refers to employees. The question then becomes is your client an employee if he did not receive wages.

hth,

Maribeth

[joelgilb]

You can have a medical reimbursement plan through the company. It can cover out-of-pocket medical expenses and medical premiums of the employees, if so stated in the plan.

I believe that it is covered under IRC §105 and you must meet two tests in order for it to be a tax-free benefit to your employees. Benefits must be available to all employees and it may not discriminate against any employee group.

My above analysis is very brief and general. However, in all cases my research refers to employees. The question then becomes is your client an employee if he did not receive wages.

hth,

Maribeth

I guess Maribeth, that is my question. Essentially the company is inactive. They have paid a developer fee from real estate investments and family partnerships, to give the illusion that it is an operating entity. Never pay a payroll to the owner shareholder and only pay enough developer fees to wipe out the current years medical expenses and health insurance of the owner/shareholder.

My belief is that this does not create en employee employer relationship, when there is NEVER a salary of any kind.

So, if that is the case I am presuming he is not an employee and therefore can not deduct the medical expense.

[RoyDaleOne]

A Section 105 should be "must" be in writing check the plan. It could be covering "retired" employees, directors (who get a director fee), and do not forget, by law officers of a corporation are employees, salary or no salary.

[joelgilb]

A Section 105 should be "must" be in writing check the plan. It could be covering "retired" employees, directors (who get a director fee), and do not forget, by law officers of a corporation are employees, salary or no salary.

Good Point! Must have had a mind Fart. Need that second wind to get through this season, or am I looking for the 3rd wind already (pun intended).

Thx

Joel

[OldJack]

By IRS definition an active officer of a corporation is an employee.

[joelgilb]

Well final piece that I just found out that makes the whole thing moot.

After all your help, I found out the shareholder / officers of this corp have Flex Spending accounts at their full time jobs, so there is no un-reimbursed medical expenses to deduct on his own corp. Yet he has been doing it for several years.

Recommended amending the open corp years, which I know he will not do and won't deduct for now or in the future.

Joel