been told a sole proprietor can set up a medical account that will
reimburse medical expenses, including those of family members. We
have not been able to confirm that. Where can we look?
Horseshoe Bay, Texas
Answer: You are referring to Section 105 of the Internal Revenue Code. This provision permits the self-employed-including sole proprietorships, partnerships and LLCs-to deduct 100 percent of their health-insurance premiums and out-of-pocket medical expenses, a benefit otherwise limited only to C-type corporations.
To qualify, you must hire your spouse as an employee of your business. You can deduct the cost of the health insurance and a variety of noncovered medical expenses as a business deduction, and your spouse won't be taxed on those amounts.
Because your spouse's family is covered, you're covered as well. Before doing this, however, we advise you to consult with a tax professional familiar with Sections 105, 106, 162 and Revenue Ruling 71-588 to make sure you proceed in the proper fashion.
Another option for the self-employed is a Medical Savings Account. With a Medical Savings Account, you put pretax dollars into a special account, much like putting money into a 401(k), which, if you don't need it for medical expenses, can grow tax-deferred until you retire.
However, even if you open a Medical Savings Account, you're still required to buy a high-deductible health-insurance policy through an insurer. Because the deductible is high (in 2001, from $1,600 to $2,400 for an individual and from $3,200 to $4,800 for a family), the policies cost about 25 percent less than other health
Small-business experts Paul and Sarah Edwards' latest book is Changing Directions Without Losing Your Way (Putnam Publishing Group). Send them your start-up business questions at www.workingfromhome.com or in care of Entrepreneur.