A Medical Expense Reimbursement Plan (MERP) is a great way for small business owners to save money by getting a deduction for all those medical expenses you can’t deduct on your personal tax return.

Since there is a 7.5% floor on medical expenses, most higher income taxpayers are not able to take this deduction.

Here’s an example: A taxpayer’s adjusted gross income is $100,000. He would have to spend $7500 in medical expenses in order to qualify for the deduction. If he spent $7501, he would get a deductoin of $1.

A MERP can save the day. Here’s how it works: Your business reimburses you and your employees for uninsured medical costs. The business gets a write-off for the amount it reimburses the employees and the employees do not have to claim the reimbursement as income!

All of your out-of-pocket expenses that are normally deductible as medical expenses qualify for the medical reimbursement program, including health insurance, prescriptions, co-pays, exams, glasses, hearing aids, hospital costs, doctors fees, dental work, lab tests, therapy, special schools & transportation for disabled children, health care supplies, fertility treatments, and much more.

Your choice of business entity has an effect on your ability to use a MERP. Only C corporations are eligible, since sole proprietors, partnerships, LLC owners, and S-corporations are considered self-employed.

If you have a fair amount of medical expenses, it will be worth the expense to establish a c-corporation in order to run your MERP.

You can establish a c-coporation in order to pay yourself or your spouse benefits as employees. Of course, this company must have a business purpose, so you should figure out what portion of your income can be segregated to the new corporation.

You will save big money on taxes by paying yourself or spouse benefits through the c-corporation because you will not have to pay the payroll taxes associated with the benefits.

Section 105 of the Internal Revenue code covers the MERP. Your plan must meet two test–it has to be considered non discriminatory and be able to provide tax free fringe benefits to employees.

1. BENEFITS TEST: All benefits for highly compensated employees and their dependents must also be provided for all other employees and their dependents. The plan can’t discriminate in favor or highly compensated employees.

2. ELIGIBILITY TEST: The plan can’t discriminate in who can participate. It must pass at least one of these requirements: (a) At least 70% of employees actually participate in the plan; (b) at least 70% of all employees are eligible to participate and at least 80% must participate; and (c) plan must be offered to a cross section of employees that is found by the IRS not to discriminate in favor of highly compensated employees.

Find out more about MERPs and start saving big money on taxes. Make it a priority to learn about other tax saving strategies in order to make sure you are saving as much money on taxes as possible!

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