Finance Tax Time

Many companies offer their employees cash incentives to undertake certain actions such as buying a hybrid car. It is important to remember that such situations have tax consequences

Employer Cash Incentives To Employees For Hybrids

Purchasing a hybrid vehicle makes sense on many fronts. It is a financial windfall given tax credits provided under the Energy Policy Act of 2005. Driving a hybrid has the additional financial advantage that one uses less gas, thus saving on fuel prices. Finally, hybrids are much easier on the environment given the fact they produce less pollution than traditional fossil fuel vehicles.

As is often the case, businesses tend to take action to promote socially positive steps before the federal government. Whether it is promoting healthier lifestyles or, in this case, a more green lifestyle, businesses almost always lead the way. The situation with hybrid cars is no different.

Many businesses are providing financial incentives to employees that purchase hybrid vehicles. These incentives can be significant. They often are offered in the form of cash payments, contributions to retirement plans and even stock options. As you might image, employees are taking advantage of the situation.

There is, however, one cautionary not for both businesses and employees when it comes to incentives for hybrids. The act of transferring wealth to the employees is considered a taxable event. Simply put, the employees must claim the amount of the incentive as income when reporting taxes. The employer is responsible for reporting said income as part of the reported W-2 wages and the employee must pay the relevant taxes.

There is one exception to this taxable income rule. If the employer is actually producing the product in question, then no taxable event occurs. In the case of the hybrid incentives, this exception would obviously only apply to employees of vehicle manufactures actually building the hybrids, to wit, Honda, Toyota, Ford, GM and so on.

The decision by many companies to offer incentives to motivate employees to purchase hybrids is laudable. It is important, however, that both employers and employees understand the tax consequences.

Richard A. Chapo is with BusinessTaxRecovery.com - providing tax information.

Share This

Filed under: Finance by admin
No Comments »

Employees of a business often incur expenses on behalf of the business. The best way for the business to reimburse such expenses is to use an accountable plan as described in Regulations Section 1.62-2. If the business uses an accountable plan, the reimbursements received by the employee are not included in the employee’s gross income. Therefore, they do not appear on the employee’s Form W-2. The reimbursement is not subject to income tax withholding or payroll taxes. The employee may not deduct the reimbursed expenses. The business deducts the expenses, except that the business may generally deduct only 50 percent of business meals and entertainment.

The employee may deduct any expenses not reimbursed as a miscellaneous itemized deduction, except that the employee may generally deduct only 50 percent of business meals and entertainment. The taxpayer must reduce total miscellaneous itemized deductions by two percent of adjusted gross income. In addition, itemized deductions generally do not provide a benefit to a taxpayer unless total itemized deductions exceed the standard deduction. Therefore, the employee may receive little, if any, tax savings from the deduction.

To qualify as an accountable plan, the employee must substantiate the expenses to the employer. The employee must document the time, place, business purpose, and amount of each expense. The employee must also return any unused advances within a reasonable time.

Some businesses use nonaccountable plans. They give each employee a certain amount that the employee may spend for business purposes. The employee may or may not be able to keep any excess depending on the plan.

While a nonaccountable plan has the advantage of simplicity, it has tax disadvantages for the employer and for the employee. Under this type of expense account arrangement, any amount the employer provides to the employee is taxable as compensation. This treatment means that the employee is subject to income tax withholding, Social Security tax, and Medicare tax on the expense account. In addition, the employer is subject to payroll taxes on the amount. The employee may deduct the actual expenses incurred, except that the employee may deduct only 50 percent of business meals and entertainment.

However, the employee may not receive any tax benefit from the deduction because employee business expenses are deductible only as a miscellaneous itemized deduction. The employee must subtract two percent of the adjusted gross income shown on the return from the total miscellaneous itemized deductions. Only the excess over this reduction is deductible. The employee’s total itemized deductions must generally exceed the standard deduction to provide any tax benefit. In addition, miscellaneous itemized deductions are not allowed for purposes of calculating the alternative minimum tax.

The best way to handle employee business expenses is to establish an accountable plan that complies with the requirements of Regulations Section 1.62-2. The tax advantages of an accountable should be greater than any increased bookkeeping burden over a nonaccountable plan.

Alan D. Campbell is a CPA in Arkansas and Florida and is self-employed primarily as an author of tax publications. He earned a Ph.D. in accounting with an emphasis in taxation from the University of North Texas. He is also admitted to practice before the United States Tax Court. He has published numerous articles on tax topics in professional journals. He is the co-author of the book Tax Strategies for the Self-Employed and the revision editor of CCH Financial and Estate Planning Guide, 15th edition. For more tax savings strategies, please see his blog: http://taxsavingsstrategies.blogspot.com

Share This

Filed under: Finance-Tax Info by admin
No Comments »

How much income tax did you pay last year?

If you are like most people, you will say the amount of tax you paid on April 15. Others will say none, they got a refund!

It is amazing that so many people are unconscious of the fact that taxes are their biggest expense. In most households, it totals more than housing, clothing and food.

To figure out how much tax you really paid, look at your pay stub and multiply the total taxes taken out, federal, state, local and social security, then multiply by 12 or 52, depending on whether you are paid monthly or weekly. Add or subtract any additional payments you made on April 15 or deduct your refund from the annual total.

Shocked? You should be.

Ever heard of “Tax Freedom Day?” That is the day in the year when the average American has made enough money to pay his taxes for the year.

For most of the country, it is, ironically, approximately April 15. For heavily taxed North East states like New York and Connecticut, with their heavier tax burdens, it can be as late as May, 25!

Think about it. You are working on your job as much as 40% of the time, just to pay your taxes. That translates to working Monday, Tuesday and until 3:15 PM on Wednesday, every week, just to pay your taxes!

Looked at another way, each day you work from 9AM-12:20PM just to pay your taxes!

How would you like to be able to stuff a lot of that money back into your wallet? You worked hard for it, don’t let the government confiscate it, especially when you see the preferential treatment others get from our friend, Uncle Sam.

The business owner, as opposed to you, the lowly employee; is under a very different, very lenient income tax system!

Don’t believe it? What percentage of all of the income taxes paid in this country by individuals and businesses is paid by corporations, you know, big businesses, Exxon, Halliburton, Mobil, etc?

Seven (7) percent!

How do they get away with that? Don’t get me started! But rather than complain, join them. As Robert Kiyosaki, the author of the Rich Dad series says, it is easier to bend the system your way than to break it

If you are a business owner, you can write off all of your necessary, reasonable and ordinary (IRS lingo) business expenses. If there is any money left in the business, you pay taxes only on that amount.

That means the business owner has paid all of her salaries, travel, transportation, benefits and entertainment with before tax income. If she has actually spent more than the business brought in, as happens most of the time in a new business, she not only has no income tax to pay, she can write off the “loss” against other income!

Whoa! Did you get that? A business pays all of its expenses and if they exceed its income, can deduct that amount from other income.

OK, how does that affect you?

You must have a business, even a home based business, such as a Network Marketing business, “The Affordable Franchise,” I call it. An Internet based business is probably best.

As long as you are trying to make a profit and you follow the IRS’s Byzantine rules on taking and documenting your business expenses; which means you should not try this without professional tax help, you can write off your business expenses (necessary, ordinary and reasonable, of course).

The irony of this approach is that you are already paying most of these expenses now; the use of your car, entertaining, vacationing, etc. When you perform the same activities with a business objective, they magically become business deductions.

Example. You drive your family to the mall on Saturday. That is clearly not a business expense. However, you stop to make a sales call or deliver product to a client near the mall. That trip now becomes primarily a business use of your car and the government will allow you to write off approximately 36 cents per mile for business use of your car. 1,000 miles equals a $360 write off.

You go out to dinner with friends or do you take prospects or clients out to dinner, see the difference? The government will let you deduct

Share This

Filed under: Finance-Tax Info by admin
No Comments »