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	Steven D. Strauss Author of The Small Business Bible
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	Joe Kennedy Author of The Small Business Owner's Manual
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	Stephanie Chandler Author of The Business Startup Checklist & Planning Guide
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	Tom Severance Author of Business Start-Up Guide
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Medical Expenses

Medical expenses and insurance may generally be deducted against the income of small businesses, but this can be a bit complex.

For sole proprietorships or similar situations where the effects of the business flow to the individual’s personal income tax return (Form 1040), a deduction is allowed on Schedule A for the amount by which total medical care expenses exceed 7.5 percent of adjusted gross income (AGI). Remember that expenses at the personal level are considered after payroll taxes, so it’s more advantageous for the small business owner to have the business pay these expenses. This is possible, because the self-employed health insurance deduction percentage is now 100 percent.

Offering medical insurance to employees is generally not required, but if a company offers medical insurance to anyone, the same deal must be offered to everyone. For example, the small business owner may not purchase a top-end policy for himself and a low-end HMO plan for other employees.

For sole proprietors, partners in a partnership, or shareholders in an S-Corporation, a deduction against income of up to 100 percent of medical insurance premiums may be allowed, and any remaining premiums may be tallied with other medical expenses as an itemized deduction on Form 1040, Schedule A (Personal Income Tax Return). This is not allowed in any month of eligibility in an employer-sponsored subsidized health plan.

The expenses incurred by you--the small business owner--your spouse, and your dependents are allowed.

What is a “medical expense”? This area is complex and easily could fill an exciting book. Generally, the small business owner can include just about anything that seems medical-related. In the unlikely event of an IRS audit and challenge, the small business would pay back taxes, a penalty, and interest on disallowed amounts.

Specifically, medical expenses include insurance premiums paid for medical coverage including accident, health, and qualified long-term care insurance. A deduction is not allowed for life insurance, for policies paying for lost income due to medical problems, or for policies that pay a fixed periodic amount when medical problems prevent a normal work schedule.

Medical expenses also include fees paid to doctors, dentists, chiropractors, psychiatrists, and certain other medical professionals. Payment for hospital services, long-term care services, nursing services, and lab fees are also allowed. Even expenses for services such as acupuncture, laser eye surgery, and substance-abuse (alcohol and drug) and inpatient treatment centers are deductible, along with the cost of items such as prescription eyeglasses, contact lenses, false teeth, crutches, hearing aids, wheelchairs, and more. The cost of insulin and prescription drugs is also deductible.

Expenses for fitness clubs, funerals, over-the-counter drugs, and most elective surgery are not allowed.

Don’t forget transportation costs associated with getting the medical care, such as an ambulance, or fares for a taxi or bus. If a car is used, compute a deduction using the standard mileage rate, or use actual expenses such as a portion of your total annual fuel, oil, parts, maintenance, etc., as previously discussed. In either case, also include parking fees and tolls. You may even deduct meals and lodging charged by the hospital or medical service provider if the reason for being there is to receive medical care.

Be careful to deduct medical expenses actually paid during the year, regardless of when the services were provided. Total medical expenses for the year must be reduced by any reimbursements received from insurance companies or others, even if the reimbursement was paid to a doctor and not to you.