Monthly Archives: May 2023

Uncategorized

Cost of Medical Expenses Related to Nutrition, Wellness, and General Health

Share

The IRS has updated their frequently asked questions (FAQs) addressing whether certain costs related to nutrition, wellness, and general health are medical expenses under IRC section 213 that
may be paid or reimbursed under a health savings account (HSA), health flexible spending arrangement (FSA), Archer medical savings account (Archer MSA), or health reimbursement arrangement
(HRA).

IRC section 213 generally allows a deduction for expenses paid during the taxable year for medical care if certain requirements are met.Generally, taxpayers deductible medical expenses must exceed 7.5% of their Adjusted Gross Income for the next dollar to be deductible and the totality of their itemized deductions must exceed the standard deduction before any tax benefits can be realized. Furthermore, only unreimbursed medical expenses are eligible to be claimed on Schedule A. Thus, the vast majority of taxpayers are unable to meet these thresholds, unless they have catastrophic medical expenses.


Expenses for medical care also are eligible to be paid or reimbursed under an HSA, FSA, Archer MSA, or HRA. However, if any amount is paid or reimbursed under an HSA, FSA, Archer MSA, or HRA, a taxpayer cannot also deduct the amount as a medical expense on the taxpayer’s federal income tax return. Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. They also include the costs of medicines and drugs that are prescribed by a physician.


Medical expenses must be primarily to alleviate or prevent a physical or mental disability or illness. They do not include expenses that are merely beneficial to general health. The following FAQs were added to irs.gov on March 17, 2023.

Q1. Is the cost of a dental exam a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A1. Yes, because the dental exam provides a diagnosis of whether a disease or illness is present.
Q2. Is the cost of an eye exam a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A2. Yes, because the eye exam provides a diagnosis of whether a disease or illness is present.
Q3. Is the cost of a physical exam a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A3. Yes, because the physical exam provides a diagnosis of whether a disease or illness is present.
Q4. Is the cost of a program to treat a drug-related substance use disorder a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A4. Yes, because the program treats a disease (substance use disorder).
Q5. Is the cost of a program to treat an alcohol use disorder a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A5. Yes, because the program treats a disease (alcohol use disorder).
Q6. Is the cost of a smoking cessation program a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A6. Yes, because the smoking cessation program treats a disease (tobacco use disorder).
Q7. Is the cost of therapy a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A7.Yes, if the therapy is treatment for a disease. For example, an amount paid for therapy to treat a diagnosed mental illness is a medical expense, but an amount paid for marital counseling is not.
Q8. Is the cost of nutritional counseling a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A8. Yes, but only if the nutritional counseling treats a specific disease diagnosed by a physician (such as obesity or diabetes). Otherwise, the cost of nutritional counseling is not a medical expense.
Q9. Is the cost of a weight-loss program a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A9. Yes, but only if the program treats a specific disease diagnosed by a physician (such as obesity, diabetes, hypertension, or heart disease). Otherwise, the cost of a weight-loss program is not a medical expense.
Q10. Is the cost of a gym membership a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A10. Yes, but only if the membership was purchased for the sole purpose of affecting a structure or function of the body (such as a prescribed plan for physical therapy to treat an injury) or the sole purpose of treating a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease). Otherwise, the cost of a gym membership is for the general health of the individual and is not a medical expense.
Q11. Is the cost of exercise for the improvement of general health, such as swimming or dancing lessons, a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A11. No, because the exercise, even if recommended by a doctor, is only for the improvement of general health.
Q12. Is the cost of food or beverages purchased for weight loss or other health reasons a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA? A12. Yes, but only if 1) the food or beverage doesn’t satisfy normal nutritional needs,
(2) the food or beverage alleviates or treats an illness, and (3) the need for the food or beverage is substantiated by a physician. The medical expense is limited to the amount by which the cost of the food or beverage exceeds the cost of a product that satisfies normal
nutritional needs. If any of the three requirements is not met, the cost of food or beverages is not a medical expense.
Q13. Is the cost of nonprescription (over-the-counter) drugs and medicines a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A13.Yes. Except for the cost of insulin, the cost of a drug that is not prescribed by a physician is not a medical expense that is deductible under IRC section 213. However, the cost of over-the-counter drugs and also menstrual care products may be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA.
Q14. Is the cost of nutritional supplements a medical expense that can be paid or reimbursed by an HSA, FSA, Archer MSA, or HRA?
A14. Yes, but only if the supplements are recommended by a medical practitioner as treatment for a specific medical condition diagnosed by a physician. Otherwise, the cost of nutritional supplements is not a medical expense.

While much of the information shared by the IRS in the FAQ is not new some of the answers do bring a new level of clarification for those individuals, for example, who have Downs Syndrome and are dealing with obesity or diabetes or need physical and occupational therapy. Of particular relevance are the answers to Questions # 7-12 and 14. Please communicate with your physician to assure you have the proper documentation to support medical deductions for the categories discussed in these specific questions and answers.

Share
Financial Planning Tips

What are Cost of Goods Sold and Does It Affect Your Business?

Share

If you are starting a small manufacturing business, even if you are operating out of your home, there is a concept call Cost of Goods Sold (COGS) that you probably need to be aware of.  COGS is the total amount your business paid as a cost directly related to the sale of products. Operators just getting started, whether it’s a mobile sandwich business or you make jewelry in the basement often think that they can call their purchases “supplies” and expense the amount they’ve spent for the year. This is not the proper tax approach.

Depending on your business, COGS may include products purchased for resale, raw materials, packaging, and direct labor related to producing or selling the good. The entrepreneur’s own labor is not a cost that can be expensed.  Labor is only what you paid to other people.

In other words, the materials that go into the product and the labor that goes into making each unit may be included in cost of goods sold. If you incur sales costs specific to that item, like commissions, those costs may also be included in COGS. The accounting term for this is direct costs.  By contrast, if a cost is general for your business, like rent, a new machine, or general marketing costs, it isn’t a cost 100% dedicated to a specific item. Those indirect costs are considered overhead, not the cost of goods sold.

Aside from just reporting your COGS, it is an important number for business owners and managers to track. That is the absolute lowest price you can sell a product to break even. Any additional margin goes back to covering overhead and eventually profit. If you don’t know your COGS and break-even point, you don’t know if you’re making or losing money.

Your cost of goods sold tells you a lot about your business, including the following:

  1. How much profit you’re making on each product
  2. If your product pricing is too high or too low
  3. Whether you need to find another vendor or supplier
  4. If you should continue to sell the product at all

Beginning inventory is the value of the raw materials and finished goods in stock at the beginning of the reporting period. In the first year of a business, the beginning inventory is typically zero, but in succeeding years, the previous year’s ending inventory becomes the next year’s beginning inventory number.

Purchases made during the reporting period include all raw materials, components, and merchandise acquired from other parties during the period.  Ending inventory is the amount counted as being on hand at the end of the reporting period. The standard formula to calculate cost of goods sold for physical products:

Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold

If you have any manufacturing labor costs or direct sales costs, you can include those as well, but that may not apply to all businesses. 

There are several methods to tracking.  First in, first out (FIFO) is the easiest method to use.  It assumes that the longest held inventory is what’s sold first whenever a company makes a sale. So, if a company paid $5 per unit a year ago and it pays $10 per unit now, when it makes a sale, COGS per unit is said to be $5 per unit until all of its year-old units are sold.

Last in first out (LIFO) is a method that considers the most recently purchased items in a company’s inventory to have sold first. So, if a company paid $5 per unit a year ago and it pays $10 per unit now, each time it makes a sale, COGS per unit is said to be $10 until all of its more recently purchased units are sold.

The averaging method for calculating COGS is a method that doesn’t consider the specific cost of individual units. It doesn’t matter what was purchased when or how a company’s inventory costs fluctuate. Instead, businesses using the averaging method establish an average per unit cost, and then multiply that average by the number of units sold during a particular period in order to determine COGS.  If you chose to track your profit and loss monthly, you would have to track COGS on a monthly basis too.

The average method is important because it represents a happy median between the FIFO and LIFO methods. It’s not the most advantageous method for tax purposes, but it’s not the worst, either. And, it’s relatively easy to apply and to use consistently.  However, once you select a method, you have to stick with it.

Inventory on hand at the end of the tax year (usually December 31st for self-employed business owners, has to be counted and valued, usually at cost.  It makes sense to create as many sub-accounts as necessary to give you as much business analytics as COGS is usually a business’ largest expense.  This will give you a fine-grained view of what constitutes this expense and also make it easier to identify cost control measures as your business grows.

If you’re purchase accounting software with a good inventory management system or point of sale (POS) module, most of these calculations will be completed automatically.  If not, you or a bookkeeper will need to track inventory and all associated costs separately in order to accurately calculate the value of your inventory and your cost of goods sold.  Based on the nature of the product and the sales cycle, it is possible for a small business owner to get their ending inventory down to a low number by each December 31st.  Speaking to an experienced bookkeeper may also be helpful.

Share