One of my clients had a busy and successful company held inside a corporation. There were over 20 full-time employees, so any benefit plans had to include the employees as well or the cost would not be deductible. `
Although C corporations allow owners a lot more freedom in taking advantage of employee benefit plans, you still can’t discriminate against other full-time employees.
His mother-in-law started having serious heart issues and, sadly, like many seniors she had inadequate insurance and mounting medical bills. He and his wife (the daughter) began paying for the expenses with their own personal after tax money. The mother-in-law and father-in-law lived over 1000 miles away and had their own home and community of friends. They weren’t ready to move into their daughter’s home to be supported so that my clients could claim the medical expense. In fact, without the extraordinary medical expenses, they were set for retirement. They wouldn’t normally need financial help. There was no way to cover the expenses and get a tax break, at least with the traditional planning.
My client’s business was expanding rapidly internationally. They needed help tracking their trademark use and making sure no one was ripping them off. It wasn’t a particularly hard job, but it was something that needed to be checked every day and it only took anywhere between 2 and 4 hours. Someone had to watch online to see what was being said about them and what promotions were done online.
We had his father-in-law start a new C corporation and then drafted an agreement between the operating company and the new C corporation to perform this work. The amount was paid to the C Corp monthly and from that amount, the medical expenses were paid by the C Corp. This was because the C Corp had a medical expense reimbursement (MERP) in place to cover both the father-in-law and mother-in-law.
An important point here, if you’re considering a similar plan is that we had to have different ownership of the second C Corporation so that it would not be considered a controlled group with the contracting corporation. If it had the same ownership, it would have been necessary to provide all the employees in the initial corporation with the same benefit plan. Because the new C Corporation was owned by the father-in-law and mother-in-law and because they did all of the work, it was a totally separate entity.
The operating company got a big deduction for the payments to the in-law’s C Corporation. The in-law’s C Corp received significant income, but also received a big deduction for the MERP contribution.
And that’s how, legally, the expenses were able to be deducted. Not only that, but the father-in-law enjoyed the work he was doing and it was a vital part of their global growth.
The business prospered. And a big tax deduction was picked up.
This is one of the main benefits that C Corporations can provide, better employee benefit plans for owners. There are a couple of others that can save you tens of thousands dollars on your tax bill.
The more you make, the less you’ll pay.
How does that sound to you? That’s the game the rich play and there is no reason why everybody can’t do it too! You just need to have a business that makes you money and you are well on your way, provided you meet a couple of criteria.
We’ll talk about what you need to do and what can stop you in the next Coaching class, C Corporations and the Trump Tax Plan, on Wednesday, August 21, 2019.
As a coaching member you have access to the past 3 months’ worth of Master Class courses. You’ll get the written Home Study Course PLUS the recording from the coaching session that accompanied it. During the session, I can take your questions through the chat room. Or, if you’d prefer, you can send questions to me ahead of time to Coaching@USTaxAid.com.