Category Archives: For Employers

Reimbursing Employee Business Expenses

The reimbursement of employee travel and other out-of-pocket business expenses is most efficiently handled when the employer has established an “accountable” expense reimbursement plan.

Under Reg. 1.62-2(c)(4), an advance or reimbursement made to an employee under an “accountable” plan is deductible by the employer and is not subject to FICA and income tax withholding.  In general, an advance or reimbursement is treated as made under an accountable plan if (1) the employee receives the advance for a deductible business expense that he paid or incurred while performing services as an employee, (2) the employee must adequately account to his employer for the expense within a reasonable period of time, and (3) the employee must return any excess reimbursement or allowance within a reasonable period of time.

Advances or reimbursements to employees which are not made pursuant to these guidelines are fully taxable to the employee and subject to FICA and income tax withholding, thus forcing the employee to deduct the business expenses on his personal tax return, as a miscellaneous itemized deduction, subject to the 2% floor.  Not the most efficient way to go.

‘S’ Corporations and Employment Taxes

The age old game of S corporations paying their owner/employees low salaries and taking most of the income out in the form of “dividends” just got another comeuppance in the courts.

The 8th Circuit Court of Appeals (Watson, P.C. v. U.S., 109 AFTR 2d 2012-483) has once again stood up for the proposition that this sort of game plan, in many cases, won’t fly.

Recall that particularly service-providers are motivated to minimize FICA and Medicare taxes by treating what might otherwise be construed as self-employment income to be S corporation dividends.  No income tax advantage, just a FICA/Medicare savings ploy.

In 2010, the House (though not the Senate) actually passed legislation which would plug this loophole with respect to service professionals.  Despite the failure by the legislative bodies to close up this gap, the courts have consistently (and once again in Watson) ruled that this game doesn’t work, pointing to these principal factors in evaluating what is the appropriate level of reasonable compensation:

  • Training and experience
  • Duties and responsibilities
  • Time and effort devoted to the business
  • Dividend history
  • Payments to non-shareholder employees
  • Timing and manner of paying bonuses to key people
  • What comparable businesses pay for similar services
  • Compensation agreements
  • Use of a formula to determine compensation

Time For a ‘Repatriation’ Tax Holiday?

With all of the talk about job creation, we’re hearing more and more about encouraging big companies to quit stashing profits abroad, and bring them back home for investment.  The contra, of course, is the potentially onerous U.S. income tax burden on businesses which would slice off a large portion of those profits before the first dollar is put to work.

So Congress has been kicking around the idea of providing a “repatriation” holiday to temporarily solve the problem – H.R. 1834, the Freedom to Invest Act of 2011 was recently introduced, to allow for a U.S. corporation to deduct dividends received from a controlled foreign corporation for a one year period, beginning on the date of enactment.

A similar measure has been introduced in the Senate – S. 1671, the Foreign Earnings Reinvestment Act, which would further provide incentives for companies to use repatriated earnings to increase payrolls, among other things.

As usual, of course, the sentiment to move forward in this manner is far from unanimous.  A recent report issued by the Democratic staff of the Senate Permanent Subcommittee on Investigations says that the 15 companies which benefited the most for a similar 2004 program actually cut more than 20,000 net jobs, and decreased the pace of their research spending.  The report cited the 2004 program as “a failed tax policy” that cost the U.S. Treasury $3.3 billion in estimated lost revenues over 10 years!

“There is no evidence that the previous repatriation tax giveaway put Americans to work, and substantial evidence that it instead grew executive paychecks, propped up stock prices, and drew more money and jobs offshore,” according to Senator Carl Levin (D-Mich).  “Those who want a new corporate tax break claim it will help rebuild our economy, but the facts are lined up against them.”

Stay tuned…..

IRS: Use of Work Cell Phones No Longer Taxable

In a rare gesture of friendliness toward taxpayers, last week the IRS allowed that personal use of employer provided cell phones generally will now be considered nontaxable — a working condition fringe benefit, the value of which is excludable from the employee’s taxable income.

It has been about a year since cell phones were removed from the “listed property” category if IRC Section 280F. And now, in Notice 2011-72, IRS states that where an employer provides employees with cell phones primarily for noncompensatory business reasons, neither the business nor personal use of the phone will result in income to the employee, and no recordkeeping of usage is required. Further, in most instances, an employer’s reimbursement for employees’ cell phone costs associated with bona fide business use won’t be taxable. This guidance applies for all tax years after 2009.

Notice 2011-72 does not address, however, the treatment of reimbursements received by employees from employers for the business use of an employee’s personal cell phone.

The Notice provides that an employer is treated as having provided an employee with a cell phone primarily for noncompensatory business purposes if there are substantial reasons relating to the employer’s business, other than providing compensation to the employee, for providing the phone.

Examples of substantial noncompensatory business reasons for requiring employees to maintain personal cell phones and reimbursing them for their use include:
1. The employer’s need to contact the employee at all times for work-related emergencies; and
2. The employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office or at times outside the employee’s normal work schedule.

Claiming the Small Business Health Care Tax Credit

If you’re a fan of the Affordable Care Act, you may be aware of one of its provisions which allows some small employers to claim a “Small Business Health Care Tax Credit.”

The credit was intended to encourage both small businesses and small tax-exempt organizations to offer health insurance coverage to their employees for the first time, or to maintain coverage (expensive as it may be) already in place.

Generally, the credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is mainly intended to help small businesses and tax-exempt organizations which employ moderate and lower income workers.

Small businesses can claim the credit for 2010 through 2013 and for any two years after that. For tax years 2010 to 2013, the maximum credit is 35% of premiums paid by eligible small businesses, and 25% of premiums paid by eligible tax-exempt organizations.

The maximum amount of the credit can be realized by the smallest of employers – those with ten or less full-time equivalent employees, to whom average annual wage payments total $25,000 or less. The credit is completely phased out for employers which have 25 or more full-time equivalents, or which pay average wages of $50,000 or more per year per person.

Check out Form 8941, Credit for Small Employer Health Insurance Premiums if you might qualify.

$4 Per Gallon for Gas? Not High Enough for IRS!

Nope — we guess it has to go a bit higher before IRS decides enough is enough, and the standard mileage rate ought to be raised.

Seems that during its May 12 payroll industry conference call, an IRS spokesperson said that the IRS has no current plans to increase the present standard rate of 51 cents per mile.

Recall that the standard rate for owned or leased cars (including vans and some trucks) was previously set at 51 cents for business travel after 2010. (Likewise, the 2011 rate for medical usage of your auto, or for its use in connection with moving is 19 cents per mile.)

The 51 cents per mile rate can also be used by employers for reimbursement of employees required to use their own auto for business, and who want to deem the reimbursement as having been made under an “accountable” expense reimbursement plan, as long as the employees appropriately document the usage to the employer. (More from Nolo on Business Tax and Deductions.)

IRS generally announces each year’s standard mileage rate near the beginning of the new tax year, but it’s not unheard of that they make a mid year correction – such as the action they took in 2008 when gas prices last spiked in a manner similar to recent experience.

But such is not in the cards, according to Ligeia Donis, Assistant Branch Chief, Office of the Chief Counsel, notwithstanding the recent spate of gas cost increases. And for two reasons, according to Donis: the possibility that gas prices could decline, and some recent whining by employers that mid-year changes are difficult to implement.

Time will tell — the year isn’t even half over yet.