Cell Phones and Other Reimbursements

Cell Phone and Other Reimbursements

Some employers provide an allowance for business use of a personal cell phone, such as paying $20 per month. These payments may be excluded from taxable income only if the employer follows the accountable plan rules.

The accountable plan rules have three requirements:

• There must be a business connection to the expense
• The employee must account for the funds within a reasonable time
• Any excess allowance must be returned to the employer.

Giving an allowance to an employee without substantiating the business expenses would make the allowance taxable income. In simple terms, the employee must verify the date, time, and business purpose of expense. The employee must also provide receipts and, if the allowance was more than the actual costs, return any excess. Otherwise, the entire allowance is taxable and must be reported on the employee’s W-2.

Employers may choose to report an allowance as income (even if it could have been excluded) and then advise the employee to keep records of business use. The employee could then claim a personal tax deduction for any business use.

Per Diem Reimbursements

IR-2006-175, Nov. 9, 2006

Revenue Ruling 2006-56 tells employers that if they routinely pay per diem allowances in excess of the federal per diem rates, but do not track the allowances and do not require the employees either to actually substantiate all the expenses or pay back the excess amounts, and do not include the excess amounts in the employee’s income and wages, then the entire amount of the expense allowances is subject to income tax and employment tax.

Generally, amounts employers pay employees to reimburse them for substantiated business expenses are not subject to income tax or employment tax. For reimbursements for expenses for meals and other incidentals associated with business travel, employees get this exclusion for reimbursements for each day of travel up to the federal per diem rates without having to actually substantiate the amounts of the expenses. However, if an employer pays expense allowances that exceed the federal per diem rates, the excess amounts are subject to income tax and employment tax if they are not repaid to the employer, unless the employee actually substantiates all of the expenses covered by the per diem allowance.

The IR (revenue ruling) illustrates when a per diem allowance arrangement that fails to track the excess amounts and does not include the unsubstantiated, unrepaid excess amounts in the employee’s income and wages constitutes a pattern of abuse of the rules for tax-free expense reimbursements. The finding that the arrangement is abusive causes all allowances paid under the arrangement to be subject to income tax and employment tax, not just the excess amounts. While the revenue ruling uses a scenario in the trucking industry because of the industry’s widespread use of per diem allowances, the analysis in the revenue ruling applies to any employer in any industry that uses per diem allowances to reimburse employee expenses. 

IRS Revenue Ruling 2006-56 is effective immediately upon issuance. However, the IRS recognizes that employers may need some time to adjust their systems so they can track excess allowances and account for them correctly. The IRS is issuing instructions to its agents not to apply the results under the revenue ruling for taxable periods ending on or before Dec. 31, 2006, in the absence of intentional noncompliance.

Affordable Car Act (ACA) Shared Responsibility Forms

Shared Responsibility Payment Forms

Any gap in qualifying insurance coverage of three months or more for you or your dependents can impact you tax return this year and require you to pay an individual-shared-responsibility payment. Certain subsidized information about your coverage and cost is reported on your income tax return and is obtained from the information you provide or that is provided to yo by either your provider(s) or employer on IRS Form 1095 forms.

Exemptions

You may be exempt from this payment if, for example:

• Affordable coverage options are not offered by your employer
• The gap in insurance coverage is three or fewer consecutive months
• You belong to a group that is explicitly exempt from participating in the Affordable Care Act by the Internal Revenue Service (IRS) such as a health sharing ministry.  There are others that you may want to research.

Form 1095-A

Insurance companies participating in health care exchanges should provide you with the Form 1095-A, a health-insurance-marketplace statement. This form includes:

• Your name
• The amount of coverage you have
• Any tax credits you were entitled to
• If you used them to pay for your health insurance and the amount you paid for coverage

You use this information to complete your income tax filing, adjust any tax credit payments and claim any premium tax credits that may be due.

Form 1095-B

Employers with fewer than 50 full-time employees that offer health coverage, as well as health care insurance providers, send the Form 1095-B to members of their health insurance plans, as of the 2016 tax year. This form includes:

• The type of coverage you have
• Your dependents covered
• The period of the coverage

This form is used to verify on your tax return that you and your dependents have at least Minimum Essential Coverage (MEC). If you had a break in health care coverage for the tax year, you may have to pay an individual shared responsibility payment.

Form 1095-C

Form 1095-C shows the coverage that is offered to you by your employer, as of the 2016 tax year. It is used by larger companies with 50 or more full-time or full-time equivalent employees. This form provides information of the coverage your employer offered and whether or not you chose to participate. You can use this to complete your tax return.

Uncollected Social Security and Medicare Taxes on Employees

Employers....Beware... There is a new form —

Form 8919, Uncollected Social Security and Medicare Tax on Wages — that employed (and I mean "not literally") workers are encouraged to file if they perform services for a firm that did not withhold FICA from pay and the worker believes he was (is) actually "employed" as an employee.

The form is a whistleblower alert to the IRS to let them know they may want to review the worker’s status at the employer level to determine whether ro not taxes should be withheld and matched.  Of course filing the form is not necessarily something that a worker might want to file while actively working for the firm. But who knows?
 

Deducting Obamacare Premiums as a Medical Expense

If you originally purchased health insurance on your own through a healthcare marketplace and you paid for this insurance with after-tax dollars, the money you paid toward your monthly premiums could be taken as a tax deduction on your Schedule A.  Of course, like all medical expenses the ability to deduct health insurance is subject to the 10% AGI limitation (7.5% for individual's 65 or older). 

If you are self-employed, any additional health insurance payments (premium tax credits)(PTC) you incur would be treated as you treated your original self-employment health insurance payments, subject to the same rules. Realize that these amounts are not paid in the same year as the original premiums were paid. They are paid at the time the return is filed or in teh year following the year the original premiums were incurred. 

So you would only be able to claim any extra health insurance payments as deductible, if your original insurance payments were deductible to you on your tax return. If you took a standard deduction. for example, you would not be able to claim the extra amounts in the following year. If you could not deduct your original health insurance premiums on your tax return then any pay backs on your tax return would not be deductible.

So if you underpaid for your insurance and you had to pay more towards your health insurance (by paying back a portion of your premium tax credit (PTC) ) then that payback could be considered additional health insurance premium payments and you can included that amount as a medical expense in the year actually paid.  So as an example, if the repayment is on your 2016 tax return, you could include this additional insurance payment on your 2017 tax return.

Have a Business Purpose When Lending To Family and Friends

In Scheurer, TC Memo. 2017-36 the Tax Court found that a taxpayer was not entitled to a business bad debt deduction for funds he advanced to a business operated by a friend. The taxpayer attempted to claim a bad-debt deduction for "loans." Given the true nature of the lender and debtor's relationship as one of many factors to be considered, the Tax Court refused to find that the loans were bona fide.  

Background

The taxpayer, who apparently worked as a financial adviser, purported to have loaned a close personal friend money to keep his robocall operation afloat. The taxpayer was aware of the friend’s poor credit rating which prevented him from obtaining a commercial loan. The taxpayer also purported to have entered into a partnership with the friend to provide merchant processing services for his business.

The financial situation of the friend’s business worsened over time, and the taxpayer and his partnership ended their involvement with the operation. On his return for that tax year, the taxpayer claimed a business bad debt deduction attributable to funds he had allegedly advanced to his friend’s business that went unpaid. Apparently, he did not report any income, expenses, or other pass-through items on his return for the merchant-processing operation.  Only after being notified of a deficiency did the taxpayer attempt to claim a loss attributable to prepaid expenses made by his partnership.

Tax Court’s analysis

The Tax Court held that the taxpayer was not able to substantiate the advanced payments being received by the company or show facts that would indicate that there was a reasonable expectation of repayment. The court could not find any evidence to support that the taxpayer’s alleged loans were debts created or acquired in connection with either the trade or business of lending money, or, alternatively, that of a financial adviser.

In addition, the partnership’s voluntary payment to taxpayer’s friend’s business was not a valid partnership expense that could give rise to a net partnership loss that could flow through to the taxpayer. The court found that the partnership’s expenses were not paid to further the partnership’s business but rather to assist the taxpayer’s friend’s business -- a personal expense. 

The court ended up re-characterizing the payments as either capital contributions or as gifts.

References: CCH's December 2017 Federal Tax Weekly 

Company-Provided Life Insurance Taxation.

This summary highlights important income tax considerations for company-provided life insurance.

Premiums Paid for by C Corporations

For policies owned by the C Corporations  or Qualified Personal Service Companies: The premium is non-deductible expense to the corporation (IRC Section 264). Since the premium is non-deductible, the annual premium amount will be part of the C Corp profit each year. This U.S. Form 1120 profit (net income) will be taxed to the C Corp as a separate tax entity at C Corp tax rates. These rates range from a low of 15% to a high of 39%, depending on the amount of taxable profit (net income).

For policies owned personally by the C Corp owner-employee, there are two options:

Option #1: If current business cash flow is used to pay premiums, the amount is deductible to the corporation as compensation paid (IRC Section 162). This amount is taxable to the C Corp owner-employee personally as W-2 compensation received. Bonus comp is considered “earned income,” and therefore, all the usual FICA taxes (OASDI and HI) must be withheld at both the personal level and the matching corporate level.

Option #2: The C Corp owner can make dividend withdrawals from balance sheet “Retained Earnings” to pay premiums. This withdrawal is a dividend distribution, which is not deductible to the C Corp. The dividend is taxable to the C Corp owner as dividend income. For tax years 2011 and 2012, this dividend distribution is taxed at a low “qualified dividend” rate of 15%. If the income tax sunset occurs this December 31, dividends distributed in 2013 and beyond will again be taxed as ordinary income at rates as high as 39.6%.

Premiums Paid for by S Corporations

Premiums paid for by an S Corp: The premium is a non-deductible expense to the corporation (IRC Section 264). Since the premium is non-deductible, the annual premium amount will be part of the S Corp profit each year. This U.S. Form 1120S profit (net income) will be “passed-through” as K-1 income to the S Corp owner personally and must be reported on the individual's Schedule E of the Form 1040 U.S. Income Tax return.

For policies owned personally by the S Corp owner-employee, there are three options:

Option #1: If current business cash flow is used to pay premiums, the amount is deductible to the corporation as compensation paid (IRC Section 162). This amount is taxable income to the S Corp owner-employee personally as W-2 compensation received. Bonus comp is considered “earned income,” and therefore, all the usual social security taxes must be withheld at both the personal level and the matching corporate level.

Option #2: The S Corp owner can use some end of year distributed K-1 “pass-through” profit to pay premiums. As stated just above, this K-1 profit is taxable to the S Corp owner personally. However, this S Corp profit is generally considered to be “unearned passive income” and, therefore, is not subject to the FICA taxes levied on “earned income.”

Option #3: The S Corp may have a previously taxed profit account, known as the Accumulated Adjustments Account (AAA) for tax accounting purposes. This AAA is the cumulative amount of any previously taxed S Corp K-1 profits from prior years that have been left in the S Corp. A tax-free withdrawal can be made from this previously taxed AAA to pay for personally owned insurance of the S Corp owner. The AAA will be adjusted downward by the amount of the withdrawal. There are no FICA taxes on AAA withdrawals that have been previously taxed as “unearned income.”

Premiums Paid for by Limited Liability Companies

For polices owned by the LLC: The premium is a non-deductible expense to the LLC (IRC Section 264). Since the premium is non-deductible, the annual premium amount will be part of the LLC profit each year. This U.S. Form 1065 profit (net income) will be “passed-through” as K-1 income to the LLC owner personally on Schedule E of the Form 1040 U.S. Income Tax return. LLCs are treated as partnerships for income tax purposes.

For policies owned personally by the LLC owner, there are three options:

Option #1: If current business cash flow is used to pay premiums, the amount is deductible to the corporation as compensation paid (IRC Section 162). This amount is taxable income to the LLC owner personally as W-2 compensation received. Bonus comp is considered “earned income,” and therefore, all the usual FICA taxes (OASDI and HI) must be withheld at both the personal level and the matching employer level.

Option #2: The LLC owner can use some of the distributed K-1 “pass-through” profits to pay the premiums. As stated above, this pass thru type profit is taxable to the LLC owner personally. However, this LLC profit is generally considered “unearned passive income” and, therefore, is not subject to the social security taxes.

Option #3: The LLC may have a previously taxed profit account, known as the capital account for tax accounting purposes. This capital account is typically the cumulative amount of any accumulated  profit (plus contributed capital) from prior years that has been left in the LLC.  A tax-free withdrawal can be made from this capital account to pay for personally owned insurance of the LLC owner. The capital account will be adjusted downward by the amount of the tax-free withdrawal.