Mass Transit And Parking

You can pay for your employees' van-pooling costs, mass transit passes, and parking fees.  As long as the monthly amounts for each employee are less than $65 for van pooling and mass transit, and $175 for parking, the value of this benefit is not included as income on the employee's W-2.

Employee Awards And Prizes

Employee awards and prizes, such as a free trip to Hawaii for your top salespeople, are generally included in an employee's income.  However, there is a limited exception for employee achievement awards.

As long as the award is truly that...and not a disguised form of compensation, your employees can exclude from income up to $400 of tangible personal property received for length of service, as a safety achievement, or other similar circumstance.

Company Automobiles

A company car is one of the fringe benefits most favored by employees.  Often, it's less expensive to provide vehicles to your employees than it is for them to use their own cars.

Company use of a vehicle is not included in the employee's income, and is deductible by the company.  Even very limited personal use, such as running errands between business meetings, is excludable from income.

However, if the employee uses the car for more than incidental personal use, including commuting to work from home, the benefit must be included in the employee's income.

All For One and One For All?

One of the most common questions we receive regarding fringe benefits is:  "Do I have to offer the same fringe benefits to everyone?"

The fringe benefits offered to your employees don't have to be identical; however, you generally must offer comparable benefits to various classes of employees.  An employer is generally required to cover a broad group of employees and is not allowed to favor key employees.

Regardless of which options you provide, benefit plans require care in both implementation and administration.  A well-designed fringe benefit plan can provide tangible and intangible awards to your employees while providing you a sizeable tax deduction.

Back to Top

Stock Options:

Not Just For Publicly Traded Companies Anymore

Once in the domain of publicly traded companies, more and more privately held companies are using stock options as a way to attract and keep key employees.  If you are considering going public, selling to a third party or transferring a business to key employees, consider the use of stock options to:

Two types of compensatory stock options are allowed under the law:  incentive stock options (ISO) and nonstatutory or nonqualified stock options (NQSO). 

Nonqualified Stock Options

NQSOs are probably the most popular type of option.  They are not subject to most of the qualification requirements of incentive stock options.

Employees generally pay tax on NQSOs when they are exercised.  The employee recognizes ordinary income on the difference between the fair market value of the stock at the time of exercise and the exercise price (a.k.a., the bargain element).

The business receives a compensation deduction equal to the amount of the bargain element, and must withhold social security taxes and income tax on the compensation.

When an employee sells the stock, capital gain (taxed at 20% if held for more than 12 months) is recognized on the difference between the proceeds from the sale and the employee's basis in the stock.  The basis is the fair market value of the stock at the time of exercise.

Incentive Stock Options

The tax consequences to both the employee and the employer are significantly different with the use of ISOs.  When an option is exercised, the employee generally doesn't recognize any income.  However, the bargain element does increase the employee's alternative minimum taxable income.

To qualify for this ISO treatment, the employee must not dispose of the stock within 2 years after the option is granted and one year after the option is exercised; otherwise the tax treatment for both the employee and the company reverts back to the nonqualified options discussed previously.  As long as employees hold their stock for the required period of time, they will pay capital gain tax at the low 20% rate.

The business generally doesn't receive any deduction in connection with an ISO, unless there is a disqualifying disposition.

To qualify for ISO treatment, a stock option plan must:

While they bring different benefits to the table, both incentive stock options and nonqualified stock options can provide the incentive you need to attract and keep quality key employees.  If you're interested in adding a stock option plan to your compensation package, contact our office.

 *Talk with us about the impact of the Alternative Minimum Tax or disqualifying dispositions.

Back to Top

A Gift Shouldn't Be A Surprise To The IRS

Everyone loves a surprise, right?  Wrong.  If you are planning to "gift" any assets to your children, make sure it doesn't come as a surprise to the IRS.  Recent rules on adequate disclosure of gifts means you may need to file a gift tax return and tell the IRS about the gift, even if no gift tax is due.

Why is the IRS getting so picky?  Assets often have values that are uncertain or hard to determine.  Particularly with nonpublicly traded stock, partnership interests, real estate, and collectibles, values can be open to argument.

Let's say you give $10,000 of stock in your business to your child, an amount that you believe represents its fair market value.  Or, perhaps you have sold the stock to your child.  In either instance, no gift tax return is required.  However, some courts have allowed the IRS to second-guess your valuation and argue that a taxable gift was made, often many years after the fact.  This revaluation may increase the gift tax and/or the estate tax.

Congress To The Rescue

Noting this obvious taxpayer dilemma, Congress recently changed the law in this area.  Under current law, filing a gift tax return starts the running of the statute of limitations for adjustments to valuation and other aspects of gifts.  This means that, generally, the IRS has only 3 years after the filing of the gift tax return to make adjustments.

There is a catch.  The gift (or a transaction between family members) must be "adequately disclosed" on the gift tax return or on a statement attached to the return.

To meet this adequate disclosure requirement, you must give the IRS information about the transaction, or gift, and how the value was determined.  A description of the property, the identity of the parties, whether trusts are involved, and information on how you determined the fair market value of the property must all be included.

You can either submit an appraisal (which has its own set of requirements), or you must include a detailed description of the valuation method used and supporting data.

While this may sound like a lot of information to pass on to the IRS, it can definitely be worthwhile.  Let's look at our previous example.

If you gift the interest in your business to your child this year, but you don't disclose the transaction on your gift tax return, the IRS would be free to second-guess your valuation.  In fact, they might determine that a gift was made (even if that was not your intention) at any time in the future.  If the IRS could successfully argue 10 years from now that you made a gift in 2000, you would owe not only the tax on the gift, but interest for 9 years as well!

In short, get that clock running.  File a gift tax return every time you make a noncash gift that uses the annual exclusion or unified credit, or any time you engage in a noncash transaction with a family member.

Because this rule applies to gifts made after 1996 for which gift tax returns are filed after December 3, 1999, new or amended gift tax returns can still be filed to offer protection on gifts made in the last few years.

Contact us if you have made gifts (or had property transactions with family members) within recent years.  We can help you determine if any action should be taken.

Do you need a Valuation?

An appraisal or valuation may be the protection you need whenever you make property gifts.  But, that may not be the only time to consider a valuation.  Valuations of closely held entities, real estate, or other property may be timely whenever you encounter one of the following situations:

1. Gifts of property.
2. Transactions between family members, which could be viewed as gifts.
3. Election of S corporation status.
4. Writing or updating shareholder/owner buy-sell agreements.
5. Conveyance of property to controlled entities.

Remember, a timely valuation can be a shield against future IRS assaults.

Back to Top