Estimated Tax Tip Savings
A swimming pool you install for medical reasons could increase your tax deductions by $12,000 or more, giving you a tax savings of $3,000 or more depending on your tax bracket. Other such home improvements can be similarly deducted.
In middle school, a note from your doctor was the perfect thing to get you out of gym class. Now that doctor’s note might get you a tax-deductible swimming pool or other home improvements that allow you to increase your deductions.
Here’s how it works
If you buy a pool for medical reasons, tax law gives you a deduction for the cost of installation and for operating expenses, even though technically the pool is a capital improvement of your home. This deduction applies to all equipment that you use in your home, workplace, or vehicle for medical purposes, including:
- ergonomic chairs;
- elevators;
- lift equipment for vehicles;
- accessibility ramps; and
- artificial limbs.
But unless you take this deduction the right way, you might not get the tax benefit you want. As you read this article, you’ll see why you, as a small-business owner, are in the perfect position to maximize your tax savings.
Immediate Deduction of a Capital Expenditure
The medical expense deduction is an exception to the normal tax rule that applies when you purchase items that last more than one year (so-called capital expenditures). A well-built pool should last decades, as long as you maintain it. Contrast this with items like paper cups that you buy for the office and quickly throw away.
Under the normal tax rules, you cannot immediately deduct capital expenditures. Instead, to the extent you can deduct these expenses at all, you must depreciate the cost over a period of years. The medical expense deduction changes this rule and allows you to immediately deduct the capital expenditures you make for medical purposes.
Here’s an added bonus—there’s no recapture of these expenses in later years if your medical condition improves but you continue to use the pool or other assets. In other words, there’s no recapture tax or other tax to pay if you begin to use the pool for non-medical purposes in later years.
How Much to Deduct
You deduct the amount of expenditure that exceeds the increase in the property value of the home. For example, let’s say that your pool costs $20,000 to install and this increases the value of your home by $8,000. This means that you can deduct $12,000 as a medical expense ($20,000 – $8,000).
100 percent exception
The IRS gives you a 100 percent deduction for medical expenditures that have little purpose outside of medical treatment. Here are some examples of expenditures that qualify for the 100 percent deduction:
- Entrance or exit ramps to the residence
- Railings, support bars, or other modifications to bathrooms
- Lowering of kitchen cabinets
- Altering of the location of electrical outlets and fixtures for accessibility
- Grading of ground to provide access to the residence
- Porch lifts and other lifts (but not elevators)
Unless your pool is very specialized for medical care, you should not count on the 100 percent exception. You should deduct the pool only to the extent the cost of the pool exceeds the value increase in your home.
Full Deduction for Operating and Maintenance Expenses
Tax law gives you a full deduction for operation and maintenance expenses. You deduct these expenses every year that you continue to use the asset for medical purposes. For example, if you have an indoor pool, you will incur costs for electricity to light the pool room and operate the cleaning equipment. You can deduct a portion of your home’s electrical bill to the extent that the cost is allocable to your use of the pool.
Prove the Medical Purpose
To take advantage of the medical expense deduction, you must show that the expenditure is used for the primary purpose of medical care and directly related to medical care.
Example of Success in Court
Herbert Cherry proved in court that his pool qualified as a medical expense. The pool was 20 feet by 40 feet; heated; located in an indoor pool room that was about one-third the size of the total house, and was equipped with a diving board and no specialized medical equipment.
Mr. Cherry could deduct the pool to the extent it exceeded the increase in the value of his home. In addition, he could deduct the yearly cost of heating the pool, insurance, electricity for the pool room, and repairs for the pool room walls that had suffered mildew damage.
Proof the pool was directly related to medical care
Mr. Cherry’s doctor recommended swimming to help his emphysema and bronchitis. The disease symptoms returned after five days when he could not swim regularly.
Proof of primary purpose
The court found that Mr. Cherry constructed and maintained the pool primarily for medical reasons because:
- he purchased it only after his doctor’s recommendation;
- he investigated less expensive alternatives before building the pool;
- he used the pool frequently (twice a day every day); and
- his wife and children used the pool only occasionally.
Example of Failure in Court
In a recent case, Charles Le Beau lost his pool deduction.8 The only evidence he could present to support his case was his personal testimony that his doctor had advised him to lose weight. He could not prove the pool was directly related to medical care and did not give evidence of the pool’s primary purpose. You can probably see why Mr. Le Beau stood no chance of getting court approval for his medical deduction. In fact, the court ordered him to fork over penalties in addition to his unpaid taxes.
Courts Like Specialized Equipment
In general, you present a stronger case when you build special medical features into the pool. Specialized equipment costs extra and is not likely to increase the value of the home. This helps you prove that you are building the pool primarily for medical reasons and not for recreation.
Here are some examples of special features that helped taxpayers win their deductions in court:
- A ramp in the pool that allowed wheelchair entry
- A wading pool that took up most of the taxpayer’s yard
- A shallow lap pool designed with wide steps to allow easy entry for the owner suffering from osteoarthritis.
Important—Business Reimbursement Works
Best There’s one more important component to maximizing your tax benefit from the medical expenditure—you don’t want to claim the deduction on your personal tax return. On your personal tax return, you can claim medical expenses only to the extent the expenses exceed 10 percent of your adjusted gross income. If you are 65 or older, that threshold drops to 7.5 percent of adjusted gross income (through the end of 2016).
How do you avoid this limit? The best option is to set up a Section 105 plan for your business. With the Section 105 plan, your business can reimburse you for the expense so that you get 100 percent of the value of the deduction. To find out how to set up a Section 105 plan, see Does Your Section 105 Plan (HRA) Work for You after Obamacare? If you do not have a Section 105 plan, you can get a similar benefit through a flexible spending account (FSA) or a health savings account (HSA). These plans are not unlimited like a Section 105 plan, so you may not get full reimbursement for big expenses. But once you get maximum reimbursement through these accounts, you can deduct the remainder on your personal return.
Takeaways
If you have a health issue and could benefit through the purchase of medical equipment such as a pool, the medical expense deduction could be exactly the thing to help you afford it. As a small-business owner, you are in an excellent position to make the most of this tax benefit because you can use your Section 105 plan to escape the 10 percent AGI limit on your personal return. Whether it’s a pool, a ramp to your home, or a mechanized lift for your vehicle, take advantage of the government’s offer to subsidize your health care treatment. It could make a huge difference in your quality of life.