Recent IRS activities have identified certain areas where businesses tend to be noncompliant. It is likely the IRS will be focusing their attention in these areas in the future. Please consider the following list and if you feel you might be in noncompliance we encourage you to give us a call.
- Any loan between an organization and a shareholder should be documented with a written promissory note containing a payment feature and a stated interest rate.
- A deduction is not allowed for the cost of entertainment, amusement or recreation unless the cost is directly related to business activities. In addition, proper documentation substantiating the expense should be maintained.
- A gift to an employee should be treated as taxable income to the employee. There is an exception for small gifts.
- An organization can deduct the cost of business gifts. However, total business gifts made during a tax year to any one individual are limited to $25 and any gift above this amount is nondeductible.
- No deduction is permitted for club dues. However, the cost of the use of club facilities may be deductible as entertainment expense if it is business related.
- Health insurance premiums and other fringe benefits paid for a shareholder who owns more than 2% of a corporation's stock are reported as additional compensation to the shareholder and included on Form W-2.
- The use of an employer-provided vehicle by an employee for personal purposes is a taxable fringe benefit to the employee. There are various methods for determining the value of the benefit to be included in the employee's wages. The choice of method depends on your organization's individual situation.
- Life insurance premiums for employer owned life insurance policies (commonly referred to as Key Man Life Insurance) where the employer is the beneficiary are not deductible.
- Shareholder and employee wages need to be reasonable in relation to the services performed.
- If an employer reimburses employees for business expenses a written accountable plan should be adopted. Under this type of plan, expense reimbursements are deductible by the employer and excluded from the employee's wages. If a plan is not in place, then the expense is not deductible by the entity and included in the taxable wages of the employee.
There may be penalties imposed on any taxpayer or preparer for a return containing a tax understatement due to an unreasonable position with regards to any income or expense reported including noncompliance on the above items.
These tax issues are complex and we are only touching on the basics. Please give us a call if we can be of assistance or provide additional information. Every organization is unique and we can evaluate your individual situation and advise you on a corrective plan of action.
Sincerely,
