If your employees incur work-related travel expenses, you can better attract and retain the best talent by reimbursing these expenses. But to secure tax-advantaged treatment for your business and your employees, it’s critical to comply with IRS rules.
Reasons to reimburse While unreimbursed work-related travel expenses generally are deductible on a taxpayer’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction, many employees won’t be able to benefit from the deduction. Why? It’s likely that some of your employees don’t itemize. Even those who do may not have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income floor. And only expenses in excess of the floor can actually be deducted. On the other hand, reimbursements can provide tax benefits to both your business and the employee. Your business can deduct the reimbursements (also subject to a 50% limit for meals and entertainment), and they’re excluded from the employee’s taxable income — provided that the expenses are legitimate business expenses and the reimbursements comply with IRS rules. Compliance can be accomplished by using either the per diem method or an accountable plan. Per diem method The per diem method is simple: Instead of tracking each individual’s actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.) The IRS per diem tables list localities here and abroad. They reflect seasonal cost variations as well as the varying costs of the locales themselves — so London’s rates will be higher than Little Rock’s. An even simpler option is to apply the “high-low” per diem method within the continental United States to reimburse employees up to $282 a day for high-cost localities and $189 for other localities. You must be extremely careful to pay employees no more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely fail to do so. Accountable plan An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:
Whether you have questions about which reimbursement option is right for your business or the additional rules and limits that apply to each, contact us. We’d be pleased to help. © 2017
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There is a significant importance for tax professionals to be capable of assisting clients and entrepreneurs with the process of choosing the correct business entity structure. There is a greater importance for entrepreneurs to seek assistance or to also understand the advantages and disadvantages of the available business entity structures available as well. Choosing the appropriate business entity structure will not only assist a business in accomplishing their business objectives, but also will determine aspects regarding taxation of income and how their assets will be protected. The most common business entity structures include: Sole Proprietorships, Limited Liability Companies, Partnerships, and Corporations. Understanding the tax advantages and tax disadvantages of the previously mentioned business entity structures may become the difference of operating a successful business and operating an unsuccessful business.
Sole Proprietorship A sole proprietorship is a business owned by one individual whom typically operates the business on a day-to-day basis; there is also no formal legal structure involved with a sole proprietorship. Generally sole proprietorships are an ideal business entity structure for small businesses such as those involving crafts. A couple advantages outlined by include:
Partnerships An additional business entity structure consists of partnerships; a business with more than one owner who all are actively engaged in the operations while equally sharing, unless specified in a written agreement, in the profits and losses. There are two forms of partnerships that exist consisting of a General Partnership and a Limited Partnership. A general partnership is commonly formed through a verbal agreement and is not required to file a partnership agreement with the state; however, it is highly recommended that partnerships implement a written agreement as quickly as possible. Advantages of a general partnership include:
Limited Liability Company A limited liability company (LLC) is a hybrid business entity structure that includes the limited liability features similar to what corporations possess while also possessing the tax and operational efficiency and flexibility that partnerships benefit from. The tax flexibility includes the ability to elect a classification, not legal classification, regarding federal income tax purposes as treatment as a partnership, a corporation, as well as a disregarded entity. Additional advantages also include:
Corporations Corporations are a unique business entity structure that can consist of one person or a group of individuals incorporated as a separate entity within the state the business is headquartered. The owners of a corporation include the corporations’ shareholders and corporations possess the ability to enter into contracts, get sued, as well as get taxed on their own. Different types of corporations include C – Corporations such as General Motors and Starbucks as well as S – Corporations which is commonly used as a pass-through entity for taxation. Advantages of C – Corporations include:
Conclusion With the proper planning and research business owners have the flexibility and freedom to elect a business entity structure providing their business with numerous advantages coupled with possible disadvantages. Therefore it is important for tax practitioners to dedicate time and energy with their clients to ensure the proper business entity structure has been implemented. |
AuthorAdam Carr, MBA, EA Archives
January 2024
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