Avoid This Husband-and-Wife LLC Mistake

The information below was provided to us from Bradford Tax Institute, My wife and I currently have a flow-through LLC in which we are both members. My wife is the real estate sales professional. Her broker pays the LLC and gives her a 1099 at the end of the year.

 

I’m the fixing, research, how-to-add-numbers, and advertising guy.

 

Questions

 

- We think we could benefit from a Section 105 health reimbursement arrangement (HRA).

 

- Would a Section 105 plan work with our husband-and-wife LLC?

 

- If not, what entity do we need to make this work?

 

- Can the 105 plan cover the full year?

 

- We currently have a health savings account (HSA). If we set up the 105-HRA, can we still add to the HSA, for tax savings?

 

Answers

 

- The Section 105 plan will not benefit the spouses in a husband-and-wife partnership

 

- To make the 105-HRA plan work, you need your wife to operate as a sole proprietorship with you as the sole employee. You may have that in place now—but you may not be aware that the proprietorship exists.

 

- You described your entity as a husband-and-wife LLC. With no election for taxation as a corporation, the husbandand-wife LLC is a partnership. In your case, that would be the worst type of entity for tax savings for you and your wife.

One Easy Way to Make the Partnership a Sole Proprietorship

 

If you live in a community property state, you can elect to treat the husband-and-wife LLC as a sole proprietorshipby simply filing your tax return as a sole proprietorship on Schedule C of your Form 1040. For how this works and why it’s a good thing, see Husband-Wife Partnerships:

Three Tax-Saving Strategies—Part 2.

 

105-HRA Effective Date

 

Your 105-HRA may not reimburse a medical care expense incurred before

 

the date the 105-HRA is in existence, or

 

the date an employee first enrolls in the 105-HRA.

 

This means you need to get the 105-HRA plan in place now so that you can start reaping the benefits right away.

 

HSA with the HRA

 

As to the HSA in combination with the 105-HRA, be careful here. In general, the HSA is not compatible with the Section 105 plan, as explained in the article Add Tax Deductions on Top of Your HSA with a Section 105 Plan, FSA, or HRA.

 

But if you have a high-deductible health plan and no HSA, then there’s no impediment to the Section 105 plan paying for all medical expenses, including the high-deductible health plan.

 

Takeaways

 

The husband-and-wife LLC taxed as a partnership is a poor entity for tax savings.

 

If you live in a community property state, you can turn a husband-and-wife partnership into a sole proprietorship by simply filing a Schedule C with your tax return.

 

In a husband-and-wife business that’s operated as a proprietorship, the Section 105-HRA is a terrific tax savings vehicle for the family’s medical expenses.

If you desire both an HSA and a Section 105-HRA, know first that the plans are not compatible and that you need to follow the guidelines laid out in Add Tax Deductions on Top of Your HSA with a Section 105 Plan, FSA, or HRA.
 

 

December 16, 2021 | DWHuff Consulting

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