Tax-Free Fringe Benefits for the Self-Employed
A comprehensive Employee Benefits Plan under Section 132 coupled with Section 119 Lodging and Meals is the most sophisticated and underutilized planning tool for starting small businesses. For a complete analysis of Section 119 Employer-Provided Lodging and Meals for starting small business owners, read our blog journal article here.
This is for small business owners. As you already know, generally, anything of value transferred by the business to the owner is considered income whether it be cash or assets. What your current tax advisory probably has never mentioned to you, however, is how fringe benefits is the exception to this general rule.
Fringe benefits are expenses that are deductible by the business but not considered income to you. In other words, it results in double non-taxation. Tax-free fringe benefits include any means of transportation provided by the Company including, but not limited to, company vehicles, trains, chauffeurs, and even corporate jets. In fact, the tax-free fringe benefit of using a corporate jet is what is often discussed during election years by politicians that criticize the tax system. This has come to be known as the corporate jet loophole. Other tax-free fringe benefits include cocktails, barbecues, picnics, daily meals on the premises, drinks on the premises, small birthday and holiday gifts, bodyguards, transit passes, and single tickets to any event such as sporting events or stage theater shows. The only two clearly stated prohibitions are season passes and membership dues to country clubs.
What does this mean for a small business owner? You are both the employer and the employee. This is not a legal fiction; it’s a reality. That’s why the IRS imposes the Self-Employment Tax, which is really both the employer and employee share of social security and Medicare taxes. For all legal purposes, you are both the employer and the employee. While that’s bad for social security tax purposes, it’s great for fringe benefits because now you can create the most gracious Employee Benefits Plan for the company’s most important employee: you.
Put plainly, it means you operate out of your home in order to deduct your entire mortgage or rental payment as employer-provided lodging, all utilities, your work vehicle, your groceries used for daily meals on the premises, your personal assistant as your Chauffeur, barbeques with family and friends (other companies allow employees to bring family and friends to gatherings without apportionment requirements), picnics, caffeinated drinks, any drinks for that matter, gifts to employees, sporting events you attend, and much more. However, it’s critical to have a well-drafted Employee Benefits Plan and to document and track all expenses. The IRS certainly doesn’t enjoy taxpayers getting wise on them, so they’ll likely initiate an examination to see if you truly have a written Employee Benefits Plan on file and have properly documented all expenses. But with our firm handling the implementation and maintenance of the Employee Benefits Plan, the IRS would be compelled to close-out any examination in your favor. Our firm only engages in the kind of planning you can openly disclose to the IRS without any concern.
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