Tax Tips Newsline – January 2015

TAX TIPS NEWSLINE  _____________________      

                                                              JANUARY 2015

 

Produced monthly for clients of the Advisory Group Associates

Our Mission:  Sharing ideas that make a real difference.

 

This “TAX TIPS NEWSLINE” is compiled by its founder, Frank Zerjav CPA and team of Professional Tax Associates, and then it is sent by email each month because you need tax and compliance knowledge.  It’s a big part of your life and the entities that you operate.

 

ORGANIZE 2014 DATA: During January, 2015, we are Emailing each client/taxpayer their Tax Organizer to be used to compile your 2014 records and efficiently deliver this data and information for preparation of an accurate tax return.  This “Tax Organizer” often shows you what was reported in the prior year. Please answer the questions and complete this accurately. It is also a good idea to use pencil.

 

Do not wait to send us your 2014 data. Often Schedules K-1 from partnerships etc. are not issued until April.  Best practice is to bring us what you have by Saturday, February 7, 2015, even if your forms 1099 and brokerage statements have not yet been received. (See Client Appreciation Brunch.) The goal is to have adequate time to let us process an accurate tax return.  If you have any questions, please do not hesitate to contact us.  Please notify us promptly of any address, e-mail, and telephone contact changes!

 

 

Bring your data and “Tax Organizer” for discussion and preparation.

 

Saturday, February 7th, 10am until 2pm

 

At the offices of Advisory Group Associates,   1980 Concourse Drive, St. Louis, MO 63146.

 

Please R.S.V.P.  At: 314-205-9595.

 

Inside this Month’s Issue

 

  • 2015 Standard Mileage Rate
  • Reminders – Compliance Issues
  • Most Often Overlooked Tax Deductions
  • Outsourcing Accounting to Save Money
  • Tax Treatment of Employer-Provided Cell Phones or IPADS
  • About the Solo 401(k) Retirement Plan
  • Tax News
  • Hire Spouse to Work in a Family Business
  • Wide Range of Solutions & Services Offered

 

2015 STANDARD MILEAGE RATES

 

Beginning on January 1, 2015, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

 

  • 57.5 cents per mile for business miles driven
  • 23 cents per mile driven for medical or moving purposes, down half a cent from 2014
  • 14 cents per mile driven in service of charitable organizations, same as 2014

 

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile.  The rate for medical and moving purposes is based on the variable costs as determined by the same study.  The charitable rate is set by law.

 

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

 

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.  In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

 

As a reminder, the IRS requires you to keep a daily log to support business miles claimed.

 

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REMINDERS – COMPLIANCE ISSUES

 

  1. Forms 1099 need to be filed annually to report payments totaling $600 or more, during the calendar year that are made to non – employee contractors or payments of interest, rent, etc. The Advisory Group can also produce necessary quarterly payroll and annual employment tax reports, including Forms 1099 and Wage Forms W-2, for a small processing fee.

 

  1. We want to remind you that owner employees that are active MUST withdraw a reasonable salary. Contact us to help compute the net paycheck for the salary level you determine or to discuss adoption of a retirement plan that helps to lower your tax burden and let you keep more of what you earn.

 

  1. We also want to remind owners of S-Corporations that IRS Notice 2008-1 requires special reporting on Wage Forms W-2 of any amounts paid under the Company’s Section 105 Medical Reimbursement Plan. The entity can pay for health, disability and long term care premiums that are deducted as compensation on Form 1120-S. Amended Wage Forms W-2 may be required to report these Section 105 reimbursements.

 

  1. Another compliance issue involves the late filing penalty that will be assessed for all tax returns not filed by their due date (including extensions). The new law asserts penalties on late filed tax returns that do not even owe taxes.  The penalty can be as much as 100% of  the amount of any unpaid tax due.

 

  1. Another reminder regarding the generous 2014 $5,340,000 lifetime gift tax exemption: The existing law includes provisions for inflation adjustments.  Under Rev Proc 2011-52 the $5,340,000 lifetime exemption is scheduled to increase to $5,430,000 for 2015.  The annual gift exclusion amount stays at $14,000 for 2015.

 

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MOST OFTEN OVERLOOKED TAX DEDUCTIONS

 

Don’t let a knowledge gap prevent you from taking advantage of these money-saving tax breaks.  Here are some of the most often overlooked tax deductions.  Claim them if you deserve them and keep more of what you earn!

 

State Sales Taxes:  Although all taxpayers have a shot at this write-off, it makes sense primarily for those who live in states that do not impose an income tax.  You must choose between deducting state and local income taxes or state and local sales taxes.  For most citizens of income-tax states, the income tax is a bigger burden than the sales tax, so the income-tax deduction is a better deal.

 

The IRS has tables that show how much residents of various states can deduct, based on their income and state and local sales tax rates.  But the tables aren’t the last word.  If you purchased a vehicle, boat or airplane, you get to add the sales tax you paid to the amount shown in the IRS table for your state.

 

The same goes for any homebuilding materials you purchased.  These add-on items are easy to overlook, but big-ticket items could make the sales-tax deduction a better deal even if you live in a state with an income tax.

 

Reinvested Dividends:  This isn’t really a tax deduction, but it is an important subtraction that can save you a bundle.  If, like most investors, your mutual fund dividends are automatically used to buy extra shares, remember that each reinvestment increases your tax basis in the fund.  That, in turn, reduces the taxable capital gain (or increases the tax-saving loss) when you redeem shares.  Forgetting to include the reinvested dividends in your basis results in double taxation of the dividends.  Once when they are paid out and immediately reinvested in more shares and later when they’re included in the proceeds of the sale.  Don’t make that costly mistake.  If you’re not sure what your basis is, ask the fund for help.

 

Out-of-Pocket Charitable Contributions:  It’s hard to overlook the big charitable gifts you made during the year, by check or payroll deduction (check your December pay stub).

 

But the little things add up, too, and you can write off out-of-pocket costs incurred while doing work for a charity.  For example, ingredients for casseroles you prepare for a nonprofit organization’s soup kitchen and stamps you buy for your school’s fundraising mailing count as a charitable contribution.  Keep your receipts and if your contribution totals more than $250, you’ll need an acknowledgement from the charity documenting the services you provided.  If you drove your car for charity, remember to deduct 14 cents per mile.

 

Student-loan interest paid by Mom and Dad:  Generally, you can only deduct mortgage or student-loan interest if you are legally required to repay the debt.  But if parents pay back a child’s student loans, the IRS treats the money as if it was given to the child, who then paid the debt.  So, a child who’s not claimed as a dependent can qualify to deduct up to $2,500 of student-loan interest paid by Mom and Dad.  He or she doesn’t have to itemize to use this money-saver.  Mom and Dad can’t claim the interest deduction even though they actually foot the bill since they are not liable for the debt.

 

Job Hunting Cost:  If you’re among the millions of unemployed Americans who were looking for a job in 2014, we hope you kept track of your job-search expenses…or can reconstruct them.  If you’re looking for a position in the same line of work, you can deduct job-hunting costs as miscellaneous expenses if you itemize.  Such expenses can be written off only to the extent that your total miscellaneous expenses exceed 2% of your adjusted gross income.  Job-hunting expenses incurred while looking for your first job don’t qualify.  Deductible job-search costs include, but aren’t limited to:

 

  • Food, lodging and transportation if your search takes you away from home overnight
  • Cab fares
  • Employment Agency Fees
  • Costs of printing resumes, business cards, postage and advertising.

 

The Cost of Moving for Your First Job:  Although job-hunting expenses are not deductible when looking for your first job, moving expenses to get to that job are.  And you get this write-off even if you don’t itemize.

 

To qualify for the deduction, your first job must be at least 50 miles away from your old home.  If you qualify, you can deduct the cost of getting yourself and your household goods to the new area.  The 23 cents a mile rate applies, boost your deduction by any amount you paid for parking and tolls for driving your own vehicle.

 

Military Reservists’ Travel Expenses:  Members of the National Guard or military reserve may tap a deduction for travel expenses to drills or meetings.  To qualify, you must travel more than 100 miles from home and be away from home overnight.  If you qualify, you can deduct the cost of lodging and half the cost of your meals, plus an allowance for driving your own car to get to and from drills.  For qualifying trips during 2014, the standard mileage rate is 55 cents a mile.  In any event, add parking fees and tolls.  And, you don’t have to itemize to get this deduction.

 

Deduction of Medicare Premiums for the Self-Employed:  Folks who continue to run their own businesses after qualifying for Medicare can deduct the premiums they pay for Medicare Part B and Medicare Part D and the cost of supplemental Medicare (medigap) policies.  This deduction is available whether or not you itemize and is not subject the 10% of AGI test that applies to itemized medical expenses.

 

Child-Care Credit:  A credit is so much better than a deduction; it reduces your tax bill dollar for dollar.  So missing one is even more painful than missing a deduction that simply reduces the amount of income that’s subject to tax.

 

You can qualify for a tax credit worth between 20% and 35% of what you pay for childcare while you work.  But if your boss offers a child care reimbursement account – which allows you to pay for the childcare with pre-tax dollars- that might be a better deal.  If you qualify for a 20% credit but are in the 25% tax bracket, for example, the reimbursement plan is the way to go.  (In any case, only expenses for the care of children under age 13 count.)

 

You can’t double dip.  Expenses paid through a plan can’t also be used to generate the tax credit.  But get this:  Although only $5,000 in expenses can be paid through a tax-favored reimbursement account, up to $6,000 for the care of two or more children can qualify for the credit.  So, if you run the maximum through a plan at work but spend even more for work-related child care, you can claim the credit on as much as $1,000 of additional expenses.  That would cut your tax bill by at least $200.

 

State Tax Paid Last Spring:  Did you owe tax when you filed your 2013 state income tax return in the spring of 2014?  Then, for goodness sake, remember to include that amount in your state-tax deduction on your 2014 federal return, along with state income taxes withheld from your paychecks or paid via quarterly estimated payments during 2014.

 

Refinancing Points:  When you buy a house, you get to deduct in one fell swoop the points paid to get your mortgage.  When you refinance, though, you have to deduct the points on the new loan over the life of that loan.  That means you can deduct 1/30th of the points a year if it’s a 30-year mortgage.  That’s $33 a year for each $1,000 of points you paid—not much, maybe, but don’t throw it away.  Even more important, in the year you pay off the loan – because you sell the house or refinance again, you get to deduct all as yet un-deducted points.  There’s one exception to this sweet rule:  If you refinance a refinanced loan with the same lender, you add the points paid on the latest deal to the leftovers from the previous refinancing, and deduct that amount gradually over the life of the new loan.

 

Jury Pay Turned Over to Your Employer:  Many employers continue to pay employees’ full salary while they serve on jury duty, and some impose a quid pro quo.  The employees have to turn over their jury pay to the company coffers.  The only problem is that the IRS demands that you report those jury fees as taxable income.  To even things out, you get to deduct the amount you give to your employer.  But how do you do it?  There’s no line on the Form 1040 labeled jury fees.  Instead the write-off goes on line 36, which purports to be for simply totaling up deductions that get their own lines.  Add your jury fees to the total of your other write-offs and write, “jury pay” on the dotted line to the left.

 

American Opportunity Credit:  This tax credit is available for up to $2,500 of college tuition and related expenses paid during the year.  The full credit is available to individuals whose modified adjusted gross income is $80,000 or less ($160,000 or less for married coupled filing a joint return).  The credit is phased out for taxpayers with incomes above those levels.  This credit is juicier than the old Hope Credit.  It has higher income limits and bigger tax breaks, and it covers all four years of college.  And if the credit exceeds your tax liability, it can trigger a refund.  (Most credits can reduce your tax to $0, but not get you a check from the IRS.)

 

Deduct those Blasted Baggage Fees:  In recent years airlines have been driving passengers batty with extra fees for baggage and for making changes in their travel plan.  All together, such fees add up to billions of dollars each year.  If you get burned, maybe Uncle Sam will help ease the pain.  If you’re self-employed and traveling on business, be sure to add those cost to your deductible travel expenses.

 

Credit for Energy-Saving Home Improvements:  Although this credit has been scaled back, it still exists and might save you some money if you made energy saving home improvements during 2014.  The credit is worth 10% of the cost of qualifying energy savers including new windows and insulation.  The maximum credit is $500 and, if you claimed this credit in the past, you’re probably out of luck now.

 

There’s also no dollar limit on the separate credit for homeowners who install qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines.  Your credit can be 30% of the total cost (including labor) of such systems installed through 2016.

 

Additional Bonus Depreciation:  Business owners can write off 50% of the cost of qualified assets placed in service during 2014.  This break applies only to new assets with recovery periods of 20 years or less, such as computers, machinery, equipment, land improvements and farm buildings.  So don’t miss out on this big tax benefit if you placed business assets in service during 2014.

 

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OUTSOURCING ACCOUNTING TO SAVE MONEY

 

Outsourcing accounting work, along with other office work, saves your company money for:

 

Unemployment Taxes, Hiring and Training, Health care Benefits, Paid-Time Off, Infrastructure (desk space, office equipment, etc), and Utilities.

 

Many companies and individuals in a variety of fields now offer outsourcing services for growing businesses.  People who work from a central office or from their own homes do the same tasks in house employees used to do, at significant savings.

 

You might consider outsourcing one or more administrative and management tasks to individuals or firms.

Outsourcing Accounting Work.  When you price outsourced accounting services, you’ll see all the money you can save.  Contact the Advisory Group (314) 205 – 9595 for your free price quote to see how much it would cost for a full fledged accounting department to manage your books from a remote location.

 

When you outsource, your bookkeeper is dedicated to your financial accounting services.  That individual doesn’t answer phones, book trips, make coffee, or do anything else that administrators might do.

 

Your bookkeeper is devoted to keeping your books; generating financial reports and helping you get a better handle on your company’s cash flow, because knowledge is power.

 

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TAX TREATMENT OF EMPLOYER-PROVIDED

CELL PHONES OR IPADS

 

 

As part of the Small Business Jobs Act of 2010, cell phones have been removed from the definition of listed property. The IRS has released guidance to clarify the treatment of employer-provided cell phones as an excludible fringe benefit. Tax-free treatment is available without burdensome recordkeeping requirements.

 

Employer-provided cell phone. When an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee. Recordkeeping of business use of the cell phone is not needed to receive tax-free treatment.

 

Cell phones provided by employers to an employee to promote morale, attract a prospective employee, or a means of providing additional compensation to an employee do not qualify as noncompensatory business reasons.

 

Employer reimbursements. Reimbursements received by an employee from an employer who requires the employee to have a cell phone for business purposes are tax-free reimbursements. Tax-free treatment does not apply for unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee’s regular wage.

 

Key tax break for iPads. The IRS has informally indicated that iPads and other tablets will be treated like cellphones when employers provide them to employees. Thus, employees won’t be taxed on the value of personal use, as long as the devices are provided primarily for business reasons rather than as a form of compensation. Similarly, reimbursements made by employers to employees for personally owned iPads generally should not be subject to tax when used primarily for business.

 

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ABOUT THE SOLO 401(k) RETIREMENT PLAN

 

 

Most limits for retirement plans didn’t budge much for 2014.  But some small business owners can take matters into their own hands.

 

Strategy: Set up a “solo 401(k) plan.”  If you qualify, you can effectively benefit from both “employee” and “employer’ contributions to your account.  In many cases, this dual tax qualifier can’t be beat because it often allows you to sock away more money than any other type of retirement plan.

 

With the usual defined contribution plan used by small business owners—such as a Simplified Employee Pension (SEP) or garden-variety profit sharing plan—the employer’s deductible contribution is capped at the lesser of 25% of compensation or $52,000 ($57,500 if you’re age 50 or older).

 

The maximum compensation that may be taken into account for these purposes is $260,000. But that’s as far as it goes.

 

In contrast, an employee participating in a traditional 401(k) plan can make an elective deferral contribution to the plan within the annual limits and the employer may match part of the contribution, usually up to a single-digit percentage of your salary.

 

A solo 401(k) offers even more. You may defer up to $18,000 of compensation to your account, plus an extra catch-up contribution of $6,000 is allowed if you’re age 50 or older—the same as with elective deferrals to a traditional 401(k) limits on deductible employer contributions still apply, but here’s the kicker.  Elective deferrals to a solo 401(k) don’t count toward the 25% cap. So you can combine an employer contribution with an employee deferral for greater savings.

 

Note that a solo 401(k) may offer other advantages. For instance, the plan can be set up to allow loans and hardship withdrawals. Also, you might roll over funds tax-free from another qualified plan if you previously worked somewhere else.  In addition, the 401(k) offers greater asset protection for business owners and professionals compared to holding IRAs.

Tip: Contributions are discretionary.  Therefore, you can cut back on your annual contribution -or skip it entirely—if your business is having a bad year.

 

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TAX NEWS

 

Review T&E reimbursements.  The tax law limits deductions for T&E expenses, including meals. But if an arrangement involves a third party – say a leasing company – who does the limit apply to?  According to the IRS, the parties can determine which one is subject to the limit. Absent such an agreement, the 50% limit applies to the party making the reimbursements

 

Beware of phony email from ‘IRS.’ We’ve said it before; we’ll say it again:  Never send personal financial data in response to unsolicited email. The IRS says scam artists are sending emails to random people, telling them they’re due a refund or under investigation. The message directs people to a fake IRS website that asks for personal data. In reality, the IRS won’t contact you via email.

 

Need an old tax return fast? Contact your tax advisor. A special IRS service lets tax practitioners receive transcripts of clients’ tax returns electronically in minutes. Taxpayers can still receive a free paper transcript of their returns within 7 to 10 days by calling the IRS at (800) 829-1040.

 

Know the difference between gifts and compensation. If you give a favorite employee a big check at Christmas, you might consider it a gift, but the IRS will likely consider it income. That could be true even if the employee and owner are family. In one case, the IRS said payments to an owner’s daughter (who was an employee) were for past services, not a gift. Talk with your tax pro if you face a similar dilemma.

 

Stockpile Section 529 funds for the future.  The amount you transfer to a Section 529 plan on behalf of a beneficiary qualities for the annual gift-tax exclusion. Under the exclusion, you can give away up to $14,000 a year – or $28,000 for joint gifts made by a married couple – to an account for the beneficiary without paying any gift tax.

 

Strategy: Front-load your contributions to a Section 529 -plan. The tax law allows you to give the equivalent of five years’ worth of contributions up front with no gift-tax consequences. The gift is treated as if it were spread out over the five-year period.

 

For instance, you and your spouse might together contribute the maximum $140000 (5 X $28,000) on behalf of a grandchild this year without paying any gift tax. If you have five grandchildren entering college soon, together you can contribute $140,000 to their Section 529 plans, completely free of any gift-tax consequences.

Tip: Any excess above the annual gift-tax exclusion may be sheltered by the lifetime gift-tax exemption.

 

Find your comfort level. Are you confident about having saved enough for retirement? According to the Employee Benefit Research Institute’s 23rd annual Retirement Confidence Survey, more than half of the respondents had some measure of confidence that they would have enough saved to be comfortable in retirement (13% very confident and 38% somewhat confident), 21% were not too confident and 28% were not at all confident.

 

Wage ceiling in 2015.  The Social Security Administration (SSA) announced that the wage ceiling will increase to $118,500 for 2015, up from $117,000 in 2014. At least the Social Security and Medicare tax withholding rates will remain the same.  The rates are 7.65% on  amounts up to the wage ceiling (6.2% -for the Social Security tax plus 1.45% for the Medicare tax) and $1.45% on amounts above that threshold (for the Medicare tax). However, at higher wage levels, the 0.9% additional Medicare tax raises the Medicare tax withholding rate to 2.35%.

 

Social Security benefits rise.  While the Social Security wage base is going up,  so are Social Security benefits. According to the Social Security Administration almost 64 million Social Security recipients are getting a 1.7% cost-of-living bump in 2015. This means that the average retired worker will see a $22 increase to $1,328 a month while the average married couple will be boosted by $36 to $2,176.  The maximum monthly Social Security check for a single baby boomer claiming benefits in 2015 at the full retirement age of 66 jumps to $2,663, up from $2,642 in 2014.

 

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HIRE SPOUSE TO WORK IN A FAMILY BUSINESS

 

Tax Issue

A sole proprietor can deduct health care costs that are paid for an employee as a business expense. By deducting the expenses directly on Schedule C (or Schedule F for a self-employed farmer), the deduction reduces both income tax and self-employment tax. It also reduces the FICA tax of an employee. Since the sole proprietor is not considered an employee of the business, his or her own health care expenses (and health care for members of his or her family) are not deductible on Schedule C or F. Rather, the self-employed individual can claim an above-the-line deduction on the front of Form 1040 for health insurance paid. The self-employed health insurance deduction reduces income tax, but not self-employment tax. The self-employed health insurance deduction also does not work under a medical reimbursement plan. Health care expenses not covered by insurance that are paid on behalf of the sole proprietor (and his or her family) are deductible on Schedule A, subject to the 10% AGI limitation.

 

Applicable Tax Law

  • Medical expenses are generally deductible on Schedule A as an itemized deduction, subject to the 10% AGI limitation.
  • The self-employed health insurance deduction allows a sole proprietor to deduct his or her health insurance premiums as an above-the-line deduction on the front of Form 1040, rather than as an itemized deduction on Schedule A. The deduction (other than for tax year 2010) does not reduce the sole proprietor’s self-employment tax. The deduction is limited to health insurance and does not include out-of-pocket medical expenses that are not covered by insurance.
  • Employer-provided health insurance and Sec 105 health reimbursement arrangements offered to employees is excluded from employee wages and deductible by the employer. If a sole proprietor is an employer and hires his or her spouse as a bona fide employee, health benefits provided to the employee-spouse are excluded from the spouse’s wages and deductible by the sole proprietor on Schedule C (or Schedule F). The deduction reduces both income and self-employment tax.
  • In order for a spouse of a sole proprietor to be treated as a bona fide employee, close scrutiny is required to determine whether a bona fide employer-employee relationship exists and whether payments are made on account of the employer-employee relationship or on account of the family relationship. The employee-spouse must perform actual services for the business and be paid an actual wage as an employee.
  • An employer-employee relationship cannot exist unless the employer has the right to control the activities of the employee.
  • Other factors that support the employer-employee characterization include consistent work by the employee for the employer, the payment of employee benefits, services provided by the employee that are integral to the business operations, employee training provided by the employer, and the existence of an employment contract.
  • If the employer establishes a medical reimbursement plan, the plan must be in writing [Reg. §1.105-11(b)(1)(i)], the employer must inform all employees of the plan, and the employees must meet the participation requirements of the plan.

 

Tax Planning Strategies

Deduct health insurance directly on Schedule C or F. A sole proprietor can deduct the cost of his or her health care directly on Schedule C or F by hiring his or her spouse to work in the family business. A deduction for 100% of the cost of providing health coverage for the sole proprietor (and his or her family) may be claimed by doing the following:

  • The sole proprietor hires his or her spouse as a bona fide employee of the business.
  • The employee-spouse performs services for the business as an employee.
  • The sole proprietor provides family accident and health coverage for all employees of the business, including the employee-spouse.
  • The cost of health coverage and medical expense reimbursements are excluded from the employee-spouse’s gross income and are deductible as a business expense by the sole proprietor. (Rev. Rul. 71-588)
  • The sole proprietor is then covered by the plan as a member of the employee-spouse’s family.
  • If the sole proprietor offers accident and health coverage through a self-insured medical expense reimbursement plan, deductible expenses include reimbursed medical expenses for health insurance premiums and other costs not reimbursed by insurance. A medical reimbursement plan converts expenses that would otherwise be Schedule A itemized deductions subject to the 10% AGI limitation into deductible business expenses.

 

Other fringe benefits. If the spouse is hired as a bona fide employee of the sole proprietor, other fringe benefits deductible by the business and excluded from the employee-spouse’s income could be provided, including group term life insurance, meals and lodging, and transportation benefits.

 

Not subject to FUTA. If the spouse is hired as a bona fide employee of the sole proprietor, taxable wages paid to the employee-spouse are not subject to federal unemployment taxes (FUTA).

 

Retain family income. If the spouse is hired as a bona fide employee of the sole proprietor, money used to pay the wages of the employee-spouse remain within the family of the sole proprietor, in contrast to wages paid to a non-family employee to perform the same job.

 

 

 

 

Possible Risks

 

  • The IRS is very aggressive in trying to claim the employee-spouse is not a bona fide employee of the business. The payments made under the accident and health plan must be on account of the employer-employee relationship and not on account of the family relationship. There are many facts and circumstances that could go against the taxpayer if the employer-employee relationship is not firmly established.

 

  • The compensation paid to the employee-spouse needs to be reasonable for the services performed. Compensation includes wages paid and the medical reimbursement plan. There is no fixed standard for determining reasonable compensation. It is determined on the facts and circumstances of each case.

 

  • If the spouse is actually an independent contractor of the business rather than a bona fide employee, the cost of accident and health insurance benefits that are provided to the spouse are not excluded from the spouse’s gross income.
  • The IRS could claim the spouse is actually a co-owner of the business rather than an employee. Factors that indicate co-ownership include joint ownership of business assets, joint sharing of profits, and joint control over business operations.

 

 

 

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TAX     ACCOUNTING     ADVISORY

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Tax Professionals consult on all aspects of tax compliance, advisory and planning, including individual, corporate, partnership, fiduciary, trust, gift and tax exempt organization tax returns.  These tax related services are provided by Zerjav & Associates, Certified Public Accountants, which has an alternative practice structure that is a separate and independent entity which works together with Advisory Group Associates to serve clients’ needs.

 

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Our complimentary monthly electronic newsletter to subscribers provides comprehensive and timely insight on a wide range of taxation issues including federal and state tax incentives and current issues.

 

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Tax Professional Standards Statement. The TAX TIPS NEWSLINE is published monthly to provide general educational tax compliance tips, information, updates and general business or economic data compiled from various sources.  This document supports the marketing of professional services and does not provide substantive determination or advice affecting specific tax liability.  It is not written tax advice directed at the particular facts and circumstances of any taxpayer.  Nothing herein shall be construed as imposing a limitation from disclosing the tax treatment or tax structure of any matter addressed.  To the extent this document may be considered written tax advice, in accordance with applicable requirements imposed under IRS Circular 230, any written advice contained in, forwarded with, or attached to this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code.

 

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