Expensing retirement center fee for family member through business

My friend’s mother recently went into a retirement center. Is there any way my friend can pay for her mother’s care through the business she owns? Obviously if she takes money out for herself and pays for her mother’s care it will be considered income and she will be heavily taxed on it. I’ve done bookkeeping but I have no experience with the tax side of things as my company always hires a CPA to do our taxes.

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  1. 28 Answers
    This answer is edited.

    As a small business owner, she can get a long-term care insurance policy for mother. This insurance will cover spouses and frequently other family members. Most long-term care insurances are Tax Qualified. Therefore, it may be eligible for tax deductions whereby benefits from the plan are income tax free. Tax qualified plans must meet certain criteria to qualify for benefits that would be paid under the terms of the policy: Inability to perform Activities of Daily Living (ADLs) (i.e. eating, dressing, transferring, bathroom personal care like bathing, toileting, etc.); Or Cognitive Impairment that determines the insured is a threat to themselves or others.

    Tax Qualified policies are eligible for Federal and State tax deductions. For Self-Employed, premiums up to the limits for individuals are treated like health insurance for the self-employed tax deduction. Self-Employed individuals (Sole proprietorships, partnerships, and other types of corporations such as LLCs or S-Corporations) can write off 100% of the individual limit regardless of the 7-1/2% Adjusted Gross Income (AGI) limit. Health premium payments are fully deductible as a reasonable business expense similar to traditional health insurance premiums which is applicable to owners, spouses and dependents, and all employees.

    Additionally, It would be advantageous for the business owner to claim her mother as a dependent maintain receipts for expenses paid on her mother’s behalf. In order for her mother to qualify as a other dependent, she must pay at least 50% of her mother’s living expenses, including clothing, food, lodging, medial and dental care, transportation, and other necessities. Also, her mother would have lived with her the entire year BEFORE she was placed into the nursing home to claim that benefit on her 2019 personal taxes.

    She should consult with your local tax professional for the appropriate tax treatment of the premiums paid.

    Some resources you might find helpful:

    https://www.irs.gov/publications/p502

    https://www.elderlawanswers.com/irs-issues-long-term-care-premium-deductibility-limits-for-2020-17450

  2. 5 Answers
    This answer is edited.

    Elder and retirement care costs continue to increase, so this is a great question! Let’s take a look at this more closely and see how we can best help your friend.

    We conduct business to make an income, and certainly the IRS understands that we have to spend money to make money. However, the expenses we run through our business need to be both “ordinary” and “necessary” according to the IRS. This is explained below, cited from page 9 of the IRS Publication 583:

    “You can deduct business expenses on your business or personal income
    Tax return, depending on the form of your business. These are the current operating costs of running your business. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business, trade or profession. A necessary expense is one that is helpful and appropriate for the business, trade or profession.”

    From the definition, we can see that a necessary expense is one that is helpful and appropriate for the business. Does your friend’s business have anything to lose or gain by paying for the mother’s retirement center? More than likely, it doesn’t.

    One of the biggest suspicions of IRS auditors when looking at small business owners is whether personal expenses are being disguised as business expenses. Remember, ordinary and necessary business expenses are deductible, and the more you can deduct, the less revenue you’ll show for the business which means the less tax you will pay. So many business owners will try and “disguise” business expenses that are really personal expenses in order to artificially reduce the amount of profit from the business and therefore the amount of tax.

    There is more than one area that could be suspect here. Payments to relatives (or even to businesses owned by relatives) are suspect to IRS auditors. Many times this is caught by IRS auditors by noting the name similarities or the large amounts being paid out to certain members of one’s family. I wouldn’t get caught up in this!

    On the flip side, there are multiple deductions and benefits your friend might be able to take advantage of by paying for her retirement home through her personal tax return instead of through the business. For example, if she provides more than half of the support for her mother, if her mother falls under the income test (for 2019 it’s $4,200 not including Social Security) she should be able to claim her mother as a dependent and be able to take advantage of various deductions and credits available to her.

    My opinion is to play it safe and don’t pay the retirement center out of the business. The mother’s retirement costs probably have nothing to do with the business your friend owns. Don’t take the chance on getting audited. Check out IRS Publication 17, Part 1 on Dependents to read more about how mom might be able to qualify as your friend’s dependent and the tax benefits she could receive.

  3. 8 Answers

    In the United States, there would be no legal way for a business owner to pay for a parent’s retirement center costs and claim those expenditures as a business expense. The Internal Revenue Service (IRS) does not allow a business to deduct personal, living, or family expenses.

    https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses

    However, there are resources available in most countries to assist in covering the costs of placing an aged senior into a retirement center. Dependent on which country your friend’s mother calls home, any further specific advice would vary. Also, not everyone has the same definition of a “retirement center”. As an example, in the United States, a retirement center might mean an independent living center which offers no medication management, no therapy, no onsite nursing care, etc. An assisted living center would offer medication management, perhaps some therapy, perhaps onsite nursing care, etc. A long-term care nursing facility would offer medication management, therapy, nursing care, etc. Those facilities all have a varying degree of “acuity” or the level of care required by a particular aged senior. Dependent on what type of facility is required, the payment options vary. For example, in a long-term care nursing facility, Medicare (federal healthcare program) would initially pay for short-term nursing home costs up to 100 days; however, Medicare would not cover any costs associated with an independent living center nor an assisted living center. Medicaid (state healthcare program) would pay for a portion of the costs associated with an assisted living center and a long-term care nursing facility; however, the program is typically set-up for low-income and low net worth persons and will only begin to pay after an aged person has used up most of their assets. Coverage varies from state to state.

    https://www.debt.org/medical/assisted-living-nursing-home-costs/

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