Download a copy of our notice for employees, calculation of additional wages and IRS tables below.
Health and accident insurance premiums paid on behalf of a greater than a 2% S corporation shareholder-employee are deductible by the S corporation and reportable as wages on the shareholder-employee’s Form W-2, subject to income tax withholding.
These additional wages are not subject to Social Security (FICA), Medicare (MEDC), or Unemployment (FUTA) taxes if the payments of premiums are made to, or on behalf of, an employee under a plan or system that makes provision for all or a class of employees (or employees and their dependents). Therefore, the additional compensation is included in the shareholder-employee’s Box 1 (Wages) of Form W-2, Wage and Tax Statement, but is not included in Boxes 3 and 5 of Form W-2.
In order to deduct health insurance on Schedule 1, line 29 included with the Form 1040, one of the following statements must be true:
The insurance plan must be established, or considered to be established as discussed in the following bullets, under the taxpayer’s business:
Medicare premiums the taxpayer voluntarily pays to obtain insurance in the taxpayer’s name that is similar to qualifying private health insurance can be used to calculate the deduction.
The use of company–owned vehicles continues to be a major issue for businesses and the IRS. It is essential that all our clients be aware of the various recordkeeping requirements and responsibilities.
The personal use of a company–owned vehicle by an employee, owner or shareholder results in “fringe benefit income” that is taxable to the user of the vehicle. The IRS has issued guidelines to follow in valuing the personal usage and in determining when and to what extent taxes must be withheld from the wages of the user.
Employers are given much leeway in the timing of withholding taxes on this fringe benefit.
A special election allows an employer to use a fiscal 12-month period ending October 31 in calculating the taxable personal use fringe benefit. This election alleviates the timing problems of calculating this fringe benefit, depositing the withheld taxes and including the information on the W-2. If the election is made, then the employer must notify its employees before January 31 of the following year. Thus, you have until January 31, 2020 to make the election for 2019.
Another election allows an employer to eliminate the need to withhold federal and state income taxes. However, the employer must withhold Medicare tax and Social Security tax if the employee has not already exceeded the withholding limits.
We recommend that our clients make these two elections annually. To do so, we have included a sample election document (Attachment A) that you should immediately copy onto your stationery and distribute to all employees (including owners) that use company provided automobiles.
There are three different methods to calculate the value of the personal use of a vehicle:
IT IS OUR RECOMMENDATION that clients rely on method 3 above —the safe harbor/automobile lease value method. his method requires that the personal use charge be based on the Fair Market Value of the vehicle. An Annual Lease Value is determined via a table provided by the IRS (see Attachment C). The personal use percentage is determined by dividing personal use miles by the total miles used during the annual period. This value is assumed to include maintenance and insurance. An additional charge of 5.5 cents per personal mile for fuel is to be added to the personal use annual lease value. Once the lease value is determined, it must be used for four full years unless the auto is transferred. After four years the Annual Lease Value is re-determined annually based on the Fair Market Value.
An employee is provided a car with a fair market value of $40,000. They drive it 5,000 miles for personal use and 10,000 miles for business use during the period November 1, 2018 through October 31, 2019 (the employer has elected a fiscal–year determination). As a result, the personal use percentage is determined to be 33%. Utilizing the IRS table, the fringe benefit value for the personal use of the car is determined to be $3,583 (i.e., $10,750 x 33%). The fuel value is determined to be $275 (i.e., 5,000 x .055). As a result, the amount to be included as additional wages on the employee’s Form W-2 is $3,858.
To ensure the timeliness of information gathering and to avoid the December bottleneck, we suggest the following actions be taken immediately:
Please refer to Attachment B for use in providing data to determine the compensation resulting from personal use of a company vehicle.
On October 3, 2018, the IRS issued new guidance in IRS Notice 2018-76 that allows business deductions for certain business meals, despite restrictions imposed by the new Tax Cuts and Jobs Act (TCJA) on entertainment expenses.
Previously, a business taxpayer could deduct 50% of the cost of qualified entertainment expenses, if those expenses were properly substantiated. This included entertainment that was “directly related” to or “associated with” the business. For instance, deductions were allowed for meals in a clear business setting as well as meals directly following or preceding a substantial business discussion. The 50% deduction for food and beverages was limited to costs that were not lavish or extravagant. Also, the business taxpayer, or a representative of the business such as an employee, had to be present when the food and beverages were served.
The IRS clarified the rules in the new guidance. Under Notice 2018-76, taxpayers may deduct 50% of the cost of business meals if:
To illustrate these rules, the IRS provided three examples when taxpayers attend sporting events with customers. These examples assume that the requirements stated above are met.
Example 1: The taxpayer takes a business contact to a baseball game and buys the tickets, hot dogs and drinks. The tickets are nondeductible entertainment expense, but the taxpayer can deduct 50% of the cost of the hot dogs and drinks purchased separately.
Example 2: The taxpayer takes a business contact to a basketball game in a luxury suite. The cost of the basketball game ticket, as stated on the invoice, includes food and beverages. Thus, the cost of the food and beverages also is an entertainment expense and nondeductible entertainment expense.
Example 3: The facts are the same as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages. In this case, the taxpayer can deduct 50% of the cost of the food and beverages.
The IRS expects to publish proposed regulations clarifying when business meal expenses are deductible and what constitutes nondeductible entertainment. Until these proposed regulations take effect, taxpayers can rely on the guidance provided in Notice 2018-76.