JoAnn Laing's Blog - All About Small Business

While often difficult to understand, company healthcare costs can sometimes become a source of tax reduction. Here is some information to help you understand when you can and cannot deduct health care premiums and medical expenses.

It is best to consult a professional advisor to determine how your particular situation can be best integrated into your tax regimen. 

Health care costs can be substantial, but it is possible to find some relief in the tax code. Insurance premiums and many medical expenses may be tax-deductible, provided they meet certain criteria.  Managing your health expenses can help you reach your company’s financial goals. 

Here are some things to know about health insurance and taxes:   

When health insurance premiums are tax-deductible 

While most individuals are not eligible to deduct health insurance premiums from their taxes, there are some circumstances to be aware of if you pay for premiums with after-tax dollars. For small business owners or self-employed individuals, there may be different rules that apply. For example, self-employed individuals can often deduct their health insurance premiums directly from their taxable income without having to itemize deductions, provided they report a net profit for the year and are not eligible for any other employer-subsidized health plans. 

• If you get insurance in the Health Insurance Marketplace:You can deduct the full cost of your health care premiums from your taxable income, even if you do not itemize your taxes. However, there are two exceptions to this rule: 
  •  If you can get health coverage through a spouse’s plan but choose to go through the health insurance marketplace instead, you are not allowed to deduct the premiums from your taxable income.
  •  If you do qualify for a premium deduction, any discounts or tax credits you receive through the public marketplace reduce the amount you can deduct from your taxes. 
• If you have health insurance through an employer-sponsored plan: While you cannot deduct your monthly premiums, you can deduct out-of-pocket premiums, provided you do not use an HSA to cover those costs. This applies only if you itemize deductions and if your total medical expenses exceed 7.5% of your adjusted gross income for the year. For most people, the amount they pay for their premiums does not meet that threshold.
• If you have health insurance through COBRA: Because you pay the premiums for insurance obtained under COBRA out of your own pocket, these health insurance premiums are also tax-deductible. As with employer-sponsored insurance, however, you can only claim the deduction if you itemize, and only if your total medical expenses exceed 7.5% of your adjusted gross income for the year. If you use HSA funds to pay for COBRA premiums or expenses, these are also not eligible for a deduction. 

Tax benefits of an HSA 

HSAs are the only investment vehicle that offers a triple tax advantage: contributions are tax-deductible, growth is tax-deferred, and withdrawals are tax-free, if they are used on qualified medical expenses. 

Key tax benefits include: 

• Any contributions made by you (or someone other than your employer) are fully deductible from your federal income taxes, even if you do not itemize your deductions. 
• Any contributions to an HSA made by your employer — including contributions made through a cafeteria plan — will be excluded from your taxable income. 
• The interest or other earnings on the assets in the account are tax-free, as are distributions, provided they go to pay for qualified medical expenses. 

Because you own your HSA, and because there are no required minimum distributions (RMDs), your account can continue spend the funds.to grow tax-free until you choose to spend the funds. 

A couple of notes: I was an early pioneer and advocate of HSAs at a time when there were 144,000 rollover medical savings accounts (MSAs); today, there are over 38 million accounts in the U.S. You must have a qualified high-deductible insurance plan before you set-up and contribute to an HSA. As a small business owner, you can offer HSAs to your employees by partnering with a provider that specializes in managing these accounts and integrating them into your benefits package. This can be a valuable addition to your overall compensation strategy. 

When you can deduct medical expenses 

Many medical expenses are deductible; however, to be eligible to claim the deduction, you will need to both itemize your taxes and spend a significant portion of your income on health care costs. Plus, you will need to have paid these medical expenses out of pocket (after-tax), not through an HSA (pre-tax). 

To qualify for the medical deduction, your unreimbursed medical and/or dental expenses need to exceed 7.5% of your adjusted gross income (AGI) for the year, and you can only deduct those expenses that exceed the 7.5%. 

Generally, most Americans do not meet this 7.5% threshold. However, if you have had a significant health event, a chronic health condition, or a condition with unusually high medical needs, it is worth exploring whether you qualify for this deduction. 

Deductible medical expenses include, but are not limited to: 

• Preventive care 
• Mental health services 
• Dental and vision insurance premiums 
• Long-term care insurance premiums 
• Travel and lodging for medical appointments in certain circumstances 

Please see the IRS Publication 502 for a list of all medical expenses that qualify. Common deductible expenses for small business owners include premiums for dental and vision insurance, long-term care insurance, and preventive care services. It is important to note that deductibility may depend on meeting specific criteria, such as the 7.5% of AGI rule. 

Timing is important to keep in mind: To deduct these expenses, it is important to know when the medical bill is paid, not when the medical procedure or service was performed. For example, if you undergo surgery in this year, 2025 but do not pay the bill until the beginning of 2026, those expenses will be eligible for deduction in the 2026 tax year, not 2025. 

Further “bunching or grouping” itemizable medical deductions with a single year may yield a bigger tax benefit. While many medical events cannot be planned ahead of time, certain elective procedures can be. If you are expecting higher spending on medical expenses, consider timing procedures and paying the bill, within a single tax year. It may allow you to obtain maximum impact by itemizing your deductible expenses in certain years, while in other years, taking the standard deduction. 

Above are some thoughts for understanding the tax implications of your health care spending, as it is a key element of your overall financial strategy. To take immediate action, consider these next steps: review this year’s medical expenses to identify opportunities for deductions, and evaluate whether you can meet the 7.5% adjusted gross income threshold for medical expense deductions when you file this year’s tax forms. Additionally, consult a tax advisor to explore group plans or the feasibility of timing elective procedures within a single tax year to maximize deductions. For further insights, it is always beneficial to consult a financial and/or tax expert. 

AI is changing work for many businesses, often saving time and cost, while also delivering better outcomes.

Yet, according to multiple studies, the primary factors hindering AI adoption are concerns about inaccuracy and data security.

Inaccuracy – to address, look for sources of data, and read/check everything.

Image by Data Science Dojo

Data security – opt out of your data being used for learning; also, check your data security measures regularly.

There are other elements as well, you should be aware of and keep in mind as you move forward with AI.

Mind the gaps to manage AI implementation

Responsibility – the potential gap between developers, application builders, and end users of AI models. Determine who is responsible for the model’s accuracy and possible harms.

Principles – businesses may enact responsible AI principles, but the teams building and deploying AI offerings often struggle to operationalize them. Ensure the teams building Ai applications have visibility into the data used to train models, have detailed information on and deploy how it may perform.

Goals – business goals need to be aligned; otherwise, gaps occur and anticipated results do not occur. First, make sure everyone is clear and aligned on why AI is being used in the first place: human augmentation or automation, operational efficiency or revenue growth, improved over human accuracy or lower cost, and other business goals. Also consider the role environmental sustainability plays in your business decisions.

Further, consider your own potential gaps:

Knowledge – not just your business knowledge, but that specifically of AI and what it can do for your business.

Patience – the initial result, even multiple iterations, often do not produce the desired outcome. You need to be patient and be more specific when you ask for clarification and provide more detailed information as a basis for going forward.

Remember, AI is not a substitute for human judgment.  With AI, it is possible to check more sources and survey larger data pools. But it takes a human in the driver’s seat to decide what to look at, which information to include, and to check the accuracy of the output.

There is a need for AI within businesses.  AI is affecting how firms think about career paths within their businesses. Already, there are reports of entry level jobs drying up, being done by AI. Ai expertise is increasingly important to how businesses operate, yet it is often difficult to attract “non-qualified” technical experts.

Please share other gaps you have identified and how AI has affected your business.

Small business leaders seldom think their enterprise can operate without them. Most never consider what must be done to ensure smooth continuity when a small business founder and/or owner becomes incapacitated   it can significantly affect the business, often leading to operational disruptions, financial strain, and more. But, having a plan in place, such as designating someone to manage the business, preparing necessary documentation, and considering insurance options, should mitigate these challenges.

Impact on the Business: The incapacitation of the  founder/owner can have a devastating impact, especially without a contingency plan.

Potential consequences include:

·   Operational disruptions: If the business founder and/or owner is incapacitated due to a serious accident, illness, or other debilitating reason, critical tasks and decision making may be left undone, disrupting daily operations, leading to delays, missed deadlines, frustrated clients and lost business.

·   Financial strain: The founder’s and/or owner’s incapacitation can create financial pressure, especially if they are the primary income source.

·   Loss of institutional knowledge: The founder and/or owner often holds critical knowledge about the business, its customers, and processes that may be lost without proper documentation.

·   Employee Loss: The resulting instability of the business can cause key, valuable employees to leave and make it difficult to attract new talent.

·   Succession disputes and loss of control: If there’s no clear succession plan, internal conflicts regarding leadership can arise, further destabilizing the business.  The business could be at risk of mismanagement or even closure.

Mitigate the Risks: Plan for incapacitation.

• Succession Planning, temporary or longer-term: Identify a trusted individual (family member, employee, or trusted friend) who can step in to manage the business during the founder’s and/or owner’s absence. This person should be granted the necessary authority to make decisions, plus have access to financial and operational information.
• Legal agreements: Formalize agreements with the designated individual, outlining their responsibilities and authority, plus compensation.
• Power of attorney: Consider granting a power of attorney for business matters to ensure seamless handling of financial operations and other key aspects of the business. Without proper planning, a court may need to appoint a conservator to manage the owner’s affairs and the business, potentially leading to delays and loss of privacy.

·   Corporate documents: Regularly update corporate documents (e.g., articles of incorporation, bylaws) to reflect current business structure and ownership arrangements.

·   Buy-sell agreements: For businesses with multiple owners, a buy-sell agreement is essential to manage transitions in the event of an owner’s incapacitation or death.

·   Develop a contingency plan: Create a written plan detailing how the business will operate in the founder’s and/or owner’s absence, including who will manage daily operations, finances, and client relationships.

·   Seek financial and legal advice: Consult with a financial advisor and legal counsel to ensure the contingency plan aligns with the founder’s and/or owner’s wishes and legal requirements, plus are strategies are tailored to the specific circumstances of the business as well as its founder and/or owner.

·   Financial management: Ensure there’s a plan for managing the business’s finances and securing sufficient funds to continue operations, including payroll and debt payments.  Set aside an emergency fund to cover an increase in expenses and/or potential loss of income during incapacitation.

·   Document key processes, client information, and financial details: Record crucial business processes and procedures as well as critical client and financial information to ensure continuity of operations, even without the founder’s and/or owner’s direct involvement.

·   Communication: Establish a communication plan to inform employees, clients, and other relevant parties about the situation, provide updates on business status, manage expectations and potential impacts, and expected timeline for return of the founder and/or owner.

·   Get disability insurance: Review existing insurance policies, including disability coverage, Disability insurance can provide a portion of the owner’s income during a period of illness, which helps alleviate personal and business financial strain, offset potential financial losses.

·   Consider key-person disability insurance: This type of coverage benefits the business, safeguards the business financially, if the founder and/or owner or other key employee becomes disabled.

·   Explore federal and state assistance programs: Programs like state-mandated disability insurance programs or Social Security Disability Insurance (SSDI) may provide some financial support.

Addressing Challenges in times of uncertainty.

·   Build a support network: Don’t go it alone, and don’t hesitate to ask for help from trusted friends, family members, or professional advisors.  Develop relationships with industry peers, freelancers, and mentors who can offer assistance, encouragement, and guidance during a crisis.

·   Seek expert advice: Consult with medical professionals, as well as financial and legal advisors, for guidance and support.

·   Automate and outsource: Leverage technology to automate routine tasks and outsource non-essential business functions to free up time and resources.

·   Delegate responsibilities: Empower and train employees to take on additional responsibilities; ensure they are familiar with key processes and client interactions.

·   Prioritize health:  The founder’s and/or owner’s return to good health should be the top priority.  Returning to work too early can prolong recovery and potentially lead to further setbacks or incapacitation.  Consider seeking professional mental health support to address the emotional and psychological challenges of managing a business while incapacitated.

·   Consider the long-term: Reflect on the business’s long-term viability and make adjustments as needed.

By proactively addressing these considerations, small business founders and/or owners can better prepare for and navigate the challenges associated with unexpected incapacitation.

All images by FREEP!K

The key to scaling and continued growth is morphing from a founder-led to a team-managed company.

After founding your company, you’ve put your all (heart, soul, capital, connections, and more) into making it a success.

The major obstacle to scaling a business is that the centralized decision-making that propelled early success becomes a bottleneck. To continue growing and increasing business value, you, the Founder and owner, should consider transitioning from a founder-led to a team-managed approach. 

Future-proof your business’ long-term success by building a management team that fuels enduring impact. 

But, establishing a management team comes with its challenges, which include:

1. Leadership gaps: The initial leadership team may lack the expertise to manage larger teams or address complex operational needs.
2. Operational inefficiencies often emerge when there is a lack of scalable leadership, causing decision-making to slow down and team alignment to weaken.
3. Additionally, rapid growth can lead to cultural fragmentation, where the company’s core values become diluted, resulting in inconsistent practices across teams.

Addressing these challenges requires a planned approach to building a leadership structure that scales with the organization.

Shift from founder-led to team-managed leadership: Founders often struggle to relinquish control; however, effective scaling requires empowerment across the entire leadership team. The Founder’s role needs to evolve into that of a strategic leader who focuses on vision and culture. To achieve this, take these action steps:

1. Delegate decisions: Define the decision-making responsibilities for team leaders, allowing you, the Founder, to focus on high-level strategy.
2. Hire complementary skills: Bring in leaders with expertise in areas where you may lack depth or interest, such as operations, human resources, sales, marketing, or finance.
3. Set boundaries: Set clear protocols for when leaders must consult you, the Founder, versus when they can make independent decisions.

Define core values to rate success: A cohesive leadership team should operate under shared values that align with the business purpose. Core values should be actionable to guide decision-making and interpersonal dynamics.  To achieve:

1. Operationalize values: Translate abstract principles into specific behaviors. For example, a value like “customer focus” might include responding to client inquiries within 24 hours.
2. Utilize values in hiring and promotions: Evaluate leadership candidates for alignment with company values to ensure a cultural fit and promote staff who embody the business’s core values.
3. Reinforce regularly: Incorporate values into performance reviews, team meetings, company-wide communications, compensation, promotions, and other areas.

Encourage accountability through having clear objectives: Accountability is essential for sustaining momentum during growth. You risk misaligned priorities and inefficiencies when there is a lack of clarity in leadership roles and goals. To establish clarity:

1. Define KPIs for managers: Establish measurable objectives for each person, tying them directly to the business’s growth goals.
2. Provide feedback: Regularly evaluate performance against objectives and adjust strategies as needed to align with business needs and the evolving marketplace.
3. Create a culture of ownership: Encourage managers to take ownership of outcomes, celebrate successes, and learn from failures. Consider providing stock in the business.

Provide learning and development: Managers need tools and training to address new responsibilities and challenges. Investing in their development enhances individual performance and strengthens the team’s and business’s resilience.  Here are some steps to take:

1. Tailor training programs to individual needs and roles: offer leadership development programs focused on skills for each individual’s function, plus more general leadership skills like strategic thinking, team management, customer service, and conflict resolution.
2. Set up a mentorship program: Pair emerging or potential managers with experienced managers and leaders to facilitate knowledge transfer and prepare the next generation for the business.
3. Provide continuous learning opportunities outside the business: Encourage leaders and managers to participate in industry conferences, workshops, and networking events to stay abreast of best practices.

Build business and management resilience for the changing business environment: The ability to pivot and lead through uncertainty, marketplace changes, aggressive competition, and/or adversity is a hallmark of strong leadership teams. Businesses are always facing external pressures, which calls for resilient leaders. To get your team ready:

1. Consider various scenarios: Train leaders to anticipate and prepare for potential disruptions. While you might think of all possibilities, considering what might happen will better prepare you for the unknown.
2. Cultivate Adaptability: Encourage leaders to view challenges as opportunities for growth and innovation. Being agile and responding should be considered a strength.
3. Promote Well-being: Provide managers and leadership teams with resources for stress management, work-life balance, and mental health. Your leaders must be solid personally for them to be effective at work.

Founder Challenges and Suggested Solutions

While this is a learning experience for all, sometimes the Founder finds it more difficult than the team to transition.  Why? The change for the Founder is more personal.

Here are some steps for the Founder to transition more successfully.

Acknowledge and assess the transition: Recognize that the transition marks a shift from a broad founder role to a more focused leadership position, one that requires different skills and perspectives.  Communicate “Why,” the reasons for the transition, and how it aligns with the business’s growth and strategy. 

Plan and prepare for the transition: Develop a comprehensive plan that outlines clear goals, realistic timelines, and effective communication strategies. Then, ensure adequate resources (mentoring, training, and budget) are available to support the transition. Set clear expectations, such as defining your new role and responsibilities and how success will be measured for both yourself and the team. Transparency is key in building trust and addressing concerns; communicate the transition clearly and involve the team in the process.

Handover leadership and onboard the team: Ensure a seamless transfer of critical business knowledge and responsibilities to the team. Establish a presence by actively engaging with the team, building strong relationships, and helping them understand their roles, opportunities, challenges, and business goals. Earn the trust of your team by dedicating time to listen and learn from them, plus demonstrate honesty, reliability, and fairness in your interactions with them.

Integrate and stabilize the team:  Empower the team by delegating responsibilities, recognizing contributions, and fostering a culture of empowerment and accountability. Encourage teamwork and open communication; facilitate a supportive environment; and constructively address conflicts. Shift the focus from your individual Founder’s vision to the team’s collective mission and the business’s goals. Set and implement key performance indicators to track progress and identify areas for improvement. Frequently ask for and act on feedback from your team and other stakeholders to identify areas for growth and development and celebrate what is working.

Ensure personal growth and adaption for all: Continuously invest in your team’s individual learning and skill development to adapt to the evolving demands of leadership. Refine your leadership style, striking a balance between fostering the company’s culture and driving necessary changes. Finally, and perhaps most importantly, be patient. Leadership transitions take time, so be patient with yourself and your team. Along the way, maintain consistency in your actions and communication. 

Following the above steps, a founder can effectively transition their business to a team-managed one, empower their team, and contribute to its ongoing success.

Long-Term Benefits of Strong Leadership

A scalable leadership team provides the foundation for sustained growth. Benefits include:

1. Increased agility: leaders who make informed decisions can respond quickly to market changes.
2. Improved efficiency: clear accountability and alignment reduce operational redundancies.
3. Enhanced stability: a team has additional strengths, perspectives, and capacity.
4. Stronger culture: unified leadership fosters consistency in values and practices across the business.
5. Greater innovation: Empowered leaders are more likely to pursue creative solutions and drive long-term success.

Leadership is the linchpin of success. By successfully transitioning to a team-centric approach, defining actionable values, fostering accountability, and investing in development, businesses can build a leadership team capable of sustaining growth and navigating challenges. The journey requires intentionality, but the rewards—both for the organization and its people—are transformative.