Distribution costs are the costs of a company incurs to carry out his trade, business or profession. The IRS allows companies to deduct these expenses as long as the company seeks to make a profit. In the previous chapter, the general requirements of deductibility of employee compensation expenses were presented. The purpose of this chapter is to present the requirements to deduct the expenses of specific employees. Employers will be able to use this information to decide whether a specific expense, as vacation pay, sick pay, allowances, etc, which incur in the course of a year can be deducted by the company.
Employers generally provide employees with compensation in different ways. In this chapter, we will focus on both cash and non-cash payments made to employees and the deductibility of such items as business expenses.
payments in cash;
Bonus: The most common type of additional payment to employees takes the form of bonuses. The IRS allows you to deduct the bonus to employees if your intent is to provide the employee with additional pay for services rendered, and not as a gift. The bonus must still meet the four tests of deductibility described in the previous chapter. The bonuses while the companies deductible as a business expense, are included in the employee's income, the same as every other consideration. Bonuses simply increase the amount of total remuneration paid to the employee in a year.
Gifts: Gifts that are of nominal value, such as a turkey at Christmas or other components, are deductible as a business expense, provided they do not exceed $ 25 fair market value. Such gifts are not included in the income of an employee, even if the company can take a tax deduction for the gift. Since these items are classified as gifts, the employee does not need to perform any service for the item to be deductible to the employer. If the employer provides employees with gifts of cash, gift certificates or other cash equivalents, these elements are considered additional compensation, no matter what the value is, and must be included in the employee's income. Therefore, the gifts should be the elements 'in nature' and not cash or cash equivalents.
deferred compensation: '. deferred compensation 'Some employers pay their employees a fixed amount each pay period and postpone some of total compensation until next year.This is generally referred to as the deduction for this amount is based on the following:
1. taxpayers accruals method can deduct the full amount of compensation (including deferred amounts) in the year the employee performs services for the company. This means that if the employee of the provision of services in a year, but the employer chose to postpone the actual payment or part of the employee's salary until next year, the employer can still deduct the payment in a year . This provision is only possible if a prior final agreement is made with the employee and the related party rules do not apply.
2. However, employers who use the cash method can only deduct the amount actually paid during the year the services I am made. Consequently, any deferral of compensation to the employee results in a loss of a deduction for the company.
There is a special rule for taxpayers accruals relating to related parties. Employers are not allowed to deduct payments to its payers until the amount due is included in return for the taxpayer. To this end, the taxpayer in question includes immediate family members who owns more than 50% stake in the company. In these situations, the employer accrual method is placed on a cash basis for the deduction of deferred compensation. Thus, owners of closely held companies are put on notice that the deferred compensation arrangements may create a tax problem regarding the year in which expenses can be deducted.
Holiday Pay: Another area that is common to most businesses involves paid holidays. This is an amount you pay or you pay for your employees while they are on vacation. If the employee chooses not to take a vacation and you pay the amount in each case, it will be included in paid holidays. The amounts of compensation for sickness or holidays are not included in paid holidays. Employers with the cash method can deduct vacation pay, as wages at the time of the employee's pay; while employers on the accrual method can deduct paid holidays during the year for a fee, if the amount is paid by the end of the year or within two and a half months after the end of the tax period. If the employer pays the amount within two months and a half after the end of the year, the amount may be deducted in the year in which it is actually paid, under the accrual basis. A recent court case has allowed the employer to deduct vacation pay that has been earned in a year as long as the employer has established an obligation to pay the employee the following year.
Miscellaneous: The employee expenses for room and board can only be deducted if they are considered ordinary and necessary and meet other deductibility of business expenses tests. The IRS has special rules for meals and lodging.The special rules have been the subject of a chapter. Other expenses that may be deducted as compensation include the amounts the employer pays for employees in case of illness and injury, less any insurance agreement. These expenses are fully deductible to the employer and not taxable to the employee as long as the repayment plan does not discriminate in favor of highly paid employees and involves only actual expenses.
non-cash payments,
The employers often compensate their employees in different ways than cash. Such payments may take the form of real estate, stock, or paying directly the expenses of an employee. These types of expenses are considered compensation expenses and are deductible, subject to special rules. As for cash payments, there are several rules, as regards the timing of these deductions.
education expenses: employers are able to pay tuition for an employee who is taking courses not required for work or otherwise linked to work. The employer may deduct the payments as wages. However, such payments must be included in the employee's gross income and are subject to FICA, FUTA, and withholding taxes, the same as other forms of compensation. The exception to this rule is if the employer has, in its place, a written plan of educational assistance such as fringe benefits offered to employees. The IRS has the following rules for these types of plans in order to qualify as a tax-free fringe benefit:
• The written plan can not discriminate between employees
• No more than five percent of the amounts Total paid or incurred by the employer for assistance during the year can be provided for shareholders or owners, each of whom have more than five percent of the stock or other capital of the employer
• the plan can not offer a choice of educational assistance and other fees includable in gross income
• the program is not required to be funded
• employees must receive reasonable notice that there the written plan.
The employer can not deduct more than $ 5,250 per employee each year. If the plan meets all of the above rules, then the employer can deduct the cost of education and should not include the expenses for the employee's W-2 form. The employee does not have to follow courses at work to qualify under this exception.
In addition to the exception above, when an employer reimburses an employee for the cost of education in courses related to work, the employer can deduct the cost as a business expense "not compensatory." This type of spending is known as a working condition fringe benefit and is not included in the employee's income.
Moving expenses: When an employer pays to an employee to move, the employer is allowed a deduction for the reimbursement to the employee of some moving expenses. There are two different types of payments per employee moving expenses: 1. The first type covers the expenses that can be deducted by the employee in the calculation of its personal income tax payable and 2. The second type involves expenses that the employee is not entitled to deduct.
The employer treats the two types of moving charges in different ways. When the employee is allowed a deduction for the costs of travel, the employer does not consider the expense to be wages. The employer reimburses the employee and takes a deduction for a normal business expense.
On the other hand, payments for expenses that the employee can not deduct moving are considered income to the employee. As a result, payments are subject to FICA, FUTA, and withholding by the employer. The employer must treat this expense as payment for services rendered. In this way, the employer is still able to deduct the expense.
When an employer pays for moving expenses, is required by law to give the employee a statement that describes the types of payments made on behalf of the employee. This statement shows the employee that the charges will be included in your gross income. The IRS provides a special form for this purpose. It is up to the employer to know the basics of reimbursement to the employee for expenses to pass his tax return. It is then up to the employee to report the income and deduct expenses on his personal tax return.
Capital Assets: A third type of non-cash payment is the transfer of a capital asset for an employee as payment for services rendered. Employers often do this when the company is short of cash. The employer can deduct the market value of the asset at the date of transfer as wages paid to an employee. The withheld amount shall be deemed to have been received in exchange for the asset (as in the sale), and the employer must recognize any gain or loss realized in the transfer. The gain or loss is the difference between the market value of the asset and the amount that the company paid for the asset, net of any impairment losses on the transfer date.
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