I paid my way through graduate school by purchasing decrepit old houses in not-so-bad neighborhoods, fixing them up, and either renting them out or selling them. While I was working on my MBA, one of the tenants in an apartment building I owned was tearing up the place and picking fights with the other tenants. I wanted him out sooner than ordinary eviction procedures would allow.
The University of Texas had a student legal office where students could get free legal advice from law interns working under the supervision of an attorney. I dropped by and asked for help getting rid of the obnoxious tenant. You´d have thought I´d asked for advice on the best way to kill kittens. "We don´t help landlords," my counselor said, as though this should have been self evident to anyone other than a complete idiot. "We only help tenants. After all, people need a place to live."
Next I went to see Dr. Nelson, a professor of business law. He was not able to help me with my problem; apparently formal eviction was the only remedy allowed by law. I gave up on the law after that and took matters into my own hands (but that´s another story).
Dr. Nelson did change my life for the better, though. I was pacing the room, complaining loudly about the student law office´s misguided concept of altruism. "Only help tenants! Where the ____ do they think the _____ tenant would be living if I hadn´t busted my _____ fixing up that building? It´s not fair!"
Dr. Nelson signaled for silence. After I shut up, he said quietly and not unkindly, "Kid, there´s something you need to learn. Life is not fair, and the sooner you stop expecting it to be fair, the happier you´ll be."
I don´t always take good advice the first time I hear it, but Dr. Nelson´s words sank in. My brain cells started rearranging themselves around this new idea. I realized I´d been wasting all kinds of energy, taking the wrong approach to problem solving and goal setting, and "?¦ well, pretty much everything. Dr. Nelson was so right. Once it occurred to me that I wasn´t being singled out for bad treatment by the universe, that life simply wasn´t fair for anyone, I stopped fretting about it (or at least I didn´t fret about it nearly as often), and I´ve been generally happier as a result. I´ve also been more effective at taking care of problems such as that obnoxious tenant and unfair tax laws.
The unfair disparity between employees and self employed people in the tax treatment of medical costs was what made me think about the advice Dr. Nelson offered so many years ago. Remember Esther and Belén, stars of my last two blog entries — Although Esther and Belén each had the same income and each spent the same amount on medical insurance, Esther saved 63% more on her taxes than Belén, simply because Esther was an employee and Belén was self employed.
If you own a business and you´re one of those taxpayers who falls under the definition of "self employed," what can you do to increase your tax savings, if you have lots of medical expenses? One thing to do, of course, as with any law that affects you, is to hound your representatives in Congress. Phone calls reinforced by letters work better than emails.
Maybe those of us who are "self employed" will eventually succeed in getting the law changed. Meanwhile, if you´re working as an individual or partner, you can incorporate your business. If you´re a shareholder in an S corporation, you can terminate the S election. Once your business is a C corporation, it can hire you. You are now an employee. You can now exclude the cost of medical insurance premiums from your gross income. Not only that — your corporation can establish a medical reimbursement plan that covers all your medical expenses, not just insurance premiums. More details on this next time. Caution: Becoming a C corporation is not always the best alternative, even for a business owner with substantial medical expenses. Also, if there are two or more owners, a C corporation might not be equally good for all of them. You would certainly want the assistance of a tax advisor in making the decision and carrying it out.
Note: In addition to the sole proprietor, "self employed" for purposes of medical tax breaks includes general partners of a partnership, and limited partners who receive guaranteed payments; members of a limited liability company (LLC) taxed as a partnership or disregarded entity; and shareholders owning more than 2% of an S corporation who received wages or a salary from the corporation.