|
|
|
|
Tax Tips
When Fringe Benefits Are Deductible and Not Taxable - February 2008
Richard Scrivanich - Partner
As defined in the tax code, “fringe benefits” can be any property or service that an employee receives besides regular compensation. Examples include professional association dues, educational assistance, free coffee or soft drinks in the employee lounge, merchandise discounts to employees, or the use of a tennis court or other athletic facility that the employer provides for employees. Generally, outlays made by an employer for fringe benefits are deductible by the company, as long as such expenses are considered ordinary and necessary for the business.
Best of both worlds
Some fringe benefits are doubly blessed – they are tax-deductible for the employer, and untaxed for the employee.
Employer-provided health insurance coverage is a familiar example. If your company pays all, or part, of the premiums for its employees, the company receives tax deductions, while the employees appreciate no taxable income. This occurs even if employees benefit from thousands of dollars worth of medical care during the year.
What’s more, even though a company health plan is an important part of an employee’s compensation package, neither Social Security nor Medicare tax is payable.
S corporation complications
The above discussion of health insurance applies to regular C corporations. If your company is an S corporation, shareholders owning more than 2% of the stock have to jump through some hoops to get the same deduction-without-taxation result.
In essence, health insurance must be acquired by the corporation, which can take the deduction for premiums paid as compensation rather than as a fringe benefit. That compensation is reported on the 2%+ owner’s W-2 statement as taxable income. The 2%+ owner can then take an above-the-line deduction for that amount, as self-employed health insurance. The outcome: the 2%+ owner’s adjusted gross income is not increased, but Social Security and Medicare tax is due.
Further difficulties may be encountered if the S corporation has only one employee, who is the 100% shareholder, in a state where such companies may not buy health insurance for that one employee. It may make sense to add a participating employee, such as the shareholder’s spouse, which qualifies the company for group coverage.
Working things out
Beyond health insurance, other types of fringe benefits are specifically excluded from income under the tax code. They include working condition fringes, de minimis fringes, no-additional-cost services, qualified employee discounts, qualified moving expenses, qualified transportation fringes, and qualified retirement planning services.
Working condition fringe benefits are those allowed as deductions to an employee who paid for them directly. Examples include employer-paid subscriptions to business periodicals, employer expenditures for employee training, and the use of a company car for business purposes.
In one case (Townsend Industries, 8th Cir. 2003), an appeals court ruled that company-sponsored fishing trips qualified as working condition fringe benefits. These annual trips, open to all employees, involved four days at a resort in Canada, known for its fishing.
The IRS wanted the value of these trips to be included as taxable compensation, but the court decided that the company expected business benefits from interaction among employees. If your company sponsors a similar form of employee entertainment, their tax position will be stronger if you schedule regular business meetings with agendas and attendance requirements.
Favored fringes
Other types of fringe benefits won’t trigger taxable income. The de minimis exception, for example, refers to items too small for the records, such as doughnuts and coffee available to workers.
No-additional-cost services could include free passes for airline employees. Qualified employee discounts, such as those offered to department store employees, are not counted as taxable income.
Reimbursements for a work-related home move, and expenses for qualified transportation, such as transit passes, are also not taxable. A relatively recent change in the law allows outside professionals to provide untaxed advice to participants in an employer-sponsored retirement plan, provided that highly- compensated employees do not get more advice than other participants.
If you have any questions regarding the above discussed topic, or any other tax matter, please feel free to give me a call at (562) 698-9891.
Return to Current Tax Tips
All rights reserved. For personal use only.
Do not duplicate or distribute without permission. All information in this
article is for informational purposes only.
Some of the articles included here were written in a prior
year or before a current tax law change. Therefore some of the information in
the older articles may not still be valid. Any dollar thresholds indicated
relate only to the year for which the article was written and could be different
for the current year. Please discuss with us your personal situation before
acting on any of the information provided. If you have any questions,
please give us a call at (562) 698-9891.
|
|
