Can a Treadmill Be a Deductible Business Expense for Your Professional Micro-Corporation?

Question: A SimpliMD coaching client recently asked:

Sally and I are looking into getting a new treadmill. She especially wants to use it for her post c-section recovery plan. I looked into the P.C. bylaws for guidance on examples of covered medical expenses and, finding none, I looked to HSA covered expenses for general examples. Medical equipment is included but only with letters of medical necessity. So as I see it, I would not be able to pass the treadmill for reimbursement by the P.C. Would this be your understanding as well? Thanks, Andy

Andy, a physician, operates a professional corporation taxed as a C-Corp. His primary role involves an employment-lite contract. When setting up his micro-corporation, the decision to opt for a C-Corp over an S-Corp was influenced by the desire to maximize fringe benefit plans, particularly healthcare expense reimbursements. Now, he wonders if a treadmill can be considered a deductible business expense under his corporate plan.

In order to answer this question for our broader community, and want to divert our focus to talk generally about S-Corps, C-Corps and fringe benefit packages. It is my opinion that one of the most valuable components of a professional micro-corporation is a personalized fringe benefit plan created exclusively for you and your household—no fat, just meat! I write about this in my post The Self-Employment Advantage: Personalized Benefits.

After the general review of corporations and fringe benefits, we'll ultimately return to collectively answer the question about the treadmill using our new information.

Understanding the Context: S-Corp vs. C-Corp

Choosing between an S-Corp and a C-Corp for your micro-corporation involves considering various tax implications and fringe benefits. In Andy’s case, he chose a C-corp structure. Here’s a brief overview:

S-Corp:

• Pass-Through Taxation: Profits and losses pass through to shareholders' personal tax returns, avoiding the double taxation seen in C-Corps.

• Limited Fringe Benefits: While S-Corps offer some fringe benefits, they are more restricted compared to C-Corps.

S-Corp Fringe Benefits:

1. Health Insurance Premiums: Can be deducted, but the premiums must be included in the shareholder-employee's W-2 wages, and the shareholder must own more than 2% of the S-Corp.

2. Retirement Plans: Contributions to retirement plans like SEP-IRAs, SIMPLE IRAs, and 401(k) plans are allowed and can provide significant tax benefits.

3. Business Expenses: Business expenses like travel, meals (50% deductible), and supplies are generally deductible.

4. Dependent Care Assistance: Up to $5,000 per year can be excluded from wages if certain conditions are met.

5. Education Assistance Programs: Up to $5,250 in educational expenses can be excluded from wages annually.

C-Corp:

• Separate Tax Entity: The corporation itself is taxed on its profits, and shareholders are taxed again on dividends (double taxation).

• Expanded Fringe Benefits: More comprehensive fringe benefits can be offered to employees, including healthcare expense reimbursements.

C-Corp Fringe Benefits:

1. Health Insurance: 100% of health insurance premiums paid by the corporation can be deducted, and they are not included in the employee's taxable income.

2. Retirement Plans: Contributions to qualified retirement plans like 401(k) or Cash Balance pension plans are deductible by the corporation and provide significant tax benefits.

3. Employee Meals and Lodging: Meals provided for the convenience of the employer and lodging can be fully deductible.

4. Life and Disability Insurance: Premiums paid by the corporation for group life and disability insurance can be deducted and are often not taxable to the employee.

5. Dependent Care Assistance: Up to $5,000 per year can be excluded from wages for dependent care assistance.

6. Education Assistance Programs: Up to $5,250 in educational expenses can be excluded from wages annually.

7. Employee Achievement Awards: Non-cash awards up to $1,600 for length of service or safety achievement can be deducted.

8. Transportation Benefits: Parking and transit benefits up to certain limits can be provided tax-free to employees.

Additional Benefits Exclusive to C-Corps:

1. Deductible Compensation: Compensation paid to employees, including bonuses and salaries, is fully deductible.

2. Medical Reimbursement Plans: More comprehensive medical reimbursement plans, covering a wider range of expenses, can be implemented.

3. Fringe Benefit Flexibility: C-Corps have more leeway to offer and deduct a variety of fringe benefits that are not available or are limited under S-Corp structures.

The Tax Classification Decision

When you consider forming a micro-corporation, one of the critical decisions you face is choosing between an S-Corp and a C-Corp tax classification. This choice is highly individualized and depends significantly on which fringe benefit packages are most important to you and your family. While many physicians find that a professional micro-corporation (PC or PLLC) taxed as an S-Corp suits their needs best, the optimal choice varies based on personal and professional circumstances.

Why the Decision is Personalized

1. Fringe Benefit Priorities:

   • You may have different priorities when it comes to fringe benefits. Some of you may value comprehensive health insurance coverage, while others might prioritize retirement benefits or education assistance for your dependents.

   • The S-Corp structure has limitations on the fringe benefits it can offer. Conversely, a C-Corp can provide a wider range of fringe benefits without these restrictions, making it appealing for those looking to maximize these benefits.

2. Income and Tax Considerations:

   • S-Corps offer pass-through taxation, which can simplify tax filings and potentially reduce your overall tax burden by avoiding double taxation. This is particularly beneficial if you expect your corporation to generate significant profits.

   • C-Corps, while subject to double taxation (at both the corporate and shareholder levels), might be advantageous if you want to reinvest profits into the business or offer extensive employee benefits.

3. Growth and Reinvestment Plans:

   • If you plan to scale your micro-corporation or reinvest a significant portion of profits back into the business, you might find the C-Corp structure more suitable.

   • S-Corps are often preferred if you intend to distribute most of the profits to shareholders and minimize retained earnings.

4. Control and Flexibility:

   • S-Corps have strict ownership and operational requirements, such as limits on the number and type of shareholders. This can be a constraint if you are looking to involve multiple partners.

   • C-Corps offer greater flexibility in terms of ownership.

The Case for S-Corp: Why It Often Fits

For many of you, an S-Corp is often the best place to land because of its simplicity and tax advantages. Key benefits include:

• Pass-Through Taxation: Profits and losses are reported on your personal tax returns, which can result in lower overall taxation.

• Avoidance of Double Taxation: Unlike C-Corps, S-Corps do not face the issue of double taxation on distributed earnings.

• Self-Employment Tax Savings: Proper structuring of salary and distributions can result in self-employment tax savings.

The Case for C-Corp: When It’s Worth Considering

A C-Corp might be the better choice if you:

• Value Comprehensive Fringe Benefits: C-Corps can offer extensive fringe benefits like full health insurance coverage, life and disability insurance, and education assistance, which are not always fully available under an S-Corp.

• Plan Significant Reinvestment: If you’re looking to reinvest earnings into growing your business, you might benefit from the C-Corp structure.

• Seek Flexibility in Ownership: C-Corps do not have the same restrictions on the number and type of shareholders as S-Corps, making them suitable for more complex ownership structures.

The Bottom Line: It Just Depends

Ultimately, the decision between an S-Corp and a C-Corp for your professional micro-corporation depends on your specific needs and priorities. Engaging with a knowledgeable legal or tax professional who understands the unique dynamics of physicians' micro-corporations can help you navigate this decision-making process effectively. I would love to connect you to those in our professional network that can you with this decision, it’s worth the time and and expense due to the ROI. It all begins with doing a business consultation with me here.

Accountable Plans: A Key Consideration

Another consideration for you within your micro-corporation includes an accountable plan. This plan allows business owners to reimburse employees for legitimate business expenses, which are not included in the employee’s gross income. To benefit from an accountable plan, you must be considered an employee of the corporation. This is an easy box to check single member micro-corporation owner because you are indeed self-employed as the only employee of your corporation.

To qualify as an accountable plan, the arrangement must meet the following requirements:

1. Business Connection: Expenses must have a business purpose and be deductible under IRS rules.

2. Substantiation: Employees must provide evidence (receipts, invoices) of the expenses within a reasonable period.

3. Return of Excess Amounts: Any reimbursement exceeding the substantiated expenses must be returned to the employer.

Accountable Plans for a C-Corp Owner

As a C-Corp owner, you can take full advantage of an accountable plan to reimburse yourself and your employees for a wide range of business expenses. Here’s how it works:

1. Reimbursable Expenses:

   • Mileage and Travel: Costs incurred for business travel, including mileage for personal vehicle use.

   • Meals and Entertainment: Business meals and entertainment expenses, typically 50% deductible.

   • Supplies and Equipment: Office supplies, medical equipment, and other necessary business items.

   • Cell Phone and Internet: Expenses related to business communication.

2. Healthcare Expenses:

   • Medical Reimbursement Plans: C-Corps can set up comprehensive medical reimbursement plans covering various healthcare costs, including premiums, medical supplies, and wellness items, provided they are substantiated and meet the plan's criteria.

3. Flexibility and Tax Benefits:

   • Deductibility: Reimbursements under an accountable plan are deductible business expenses for the corporation and are not included in the employee's taxable income.

   • Comprehensive Benefits: As a C-Corp owner, you can offer a broader range of fringe benefits, enhancing employee satisfaction and retention.

Accountable Plans for an S-Corp Owner

For S-Corp owners, accountable plans function similarly but with some important distinctions due to the nature of S-Corp taxation and ownership rules:

1. Reimbursable Expenses:

   • Mileage and Travel: Similar to C-Corps, but with a focus on substantiating that expenses are directly related to business activities.

   • Meals and Entertainment: Business meals and entertainment are typically 50% deductible, with proper documentation.

   • Supplies and Equipment: Deductible as long as they are ordinary and necessary for business operations.

   • Cell Phone and Internet: Expenses related to business communication are reimbursable.

2. Healthcare Expenses:

   • Health Insurance Premiums: Premiums paid for more-than-2% shareholder-employees must be included in their W-2 wages but can still be deducted by the S-Corp.

   • Medical Reimbursement Plans: More limited compared to C-Corps. Specific restrictions apply to more-than-2% shareholders regarding deductible healthcare benefits.

3. Ownership and Deductibility:

   • Shareholder Restrictions: More-than-2% shareholders face stricter rules on the tax treatment of fringe benefits. These benefits are often included in the shareholder's taxable income but can be deducted by the S-Corp as wages.

   • Pass-Through Taxation: Reimbursements under an accountable plan are not included in the shareholders’ pass-through income, provided they meet the accountable plan criteria.

Practical Tips for Implementing Accountable Plans

1. Document Everything: Ensure all reimbursed expenses are well-documented with receipts and clear business purposes.

2. Establish Clear Policies: Create written policies detailing which expenses are reimbursable and the documentation required.

3. Consult Professionals: Work with legal and tax advisors to set up your accountable plan correctly and ensure compliance with IRS rules.

Treadmills and Wellness Items: What’s Deductible?

Now let’s back out of this rabbit hole of information and answer the original question posed by Andy. Can his treadmill purchase use pre-tax dollars through his corporation, or does he have to use post-tax dollars for this health related product?

Under a C-Corp: A treadmill can potentially be reimbursable, but it hinges on whether it's classified as a wellness item or a medical expense.

• Wellness Items: Generally not deductible or reimbursable unless linked to a medical condition.

• Medical Expenses: If deemed medically necessary (e.g., prescribed for physical therapy), a treadmill can qualify for reimbursement.

To classify the treadmill as a deductible medical expense, a letter from a healthcare provider stating its necessity is required. For example, if Sally needs the treadmill as part of her recovery plan post-surgery, it could be considered medically necessary.

Under an S-Corp: Reimbursement for wellness items under an S-Corp follows similar guidelines but may face stricter scrutiny and limitations. The key factors remain medical necessity and proper documentation.

Conclusion

For Andy and Sally, the treadmill may be reimbursable under their C-Corp’s accountable plan, provided it’s medically necessary and documented accordingly. Always consult with an expert to ensure compliance and maximize the benefits of your corporate structure.

By understanding the nuances of S-Corp and C-Corp fringe benefit structures and leveraging accountable plans, you can make informed decisions about their professional micro-corporations and optimize their tax benefits and fringe benefits.

This example illustrates why choosing someone who understands the tax optimization playbook specific to doctors is crucial when considering your business formation and structure. They must connect all the dots, incorporating legal and accounting compliance elements. The great news is that I have done all this work for you, saving you both time and money. I encourage you to Engage with SimpliMD and let me be your business guide, connecting you to the right professionals who provide our members with discounted fees and highly personalized treatment.

It's worth noting that my business guide services offer a thoughtful balance of risk mitigation, time efficiency, and cost-effectiveness. I offer a higher return on investment with your business formation dollars, when compared to self-directed or generic legal service options. It's important to recognize that your tendency towards self-reliance, might initially overlook this valuable solution that I am offering to you.