Tax information on employee-benefits, consumer interest strategies, employees with dependents, and gift deductions.
The New Benefits Law
. . . plus gift deductions, consumer-interest strategies, and help for employees with dependents
Every Employer Must Comply with Section 89 Section 89, the new section of the IRS code aimed at discriminatory employee-benefit plans, goes into effect January 1. No employer can ignore it even though it's doubtful all the regulations concerning it will be issued by then.
Strategies to deal with Section 89 are already being suggested. For instance, if you find that your highly compensated employees are receiving excess benefits, you could conceivably increase their gross salaries to cover the additional income taxes that must be withheld from them.
But whether or not you go that route, all employers must first wade through considerable computations to determine whether their benefit plans are in compliance. Among the things you need to know for all employees: the date of hire (and termination, if recent); hours of service; compensation; if they are eligible and whether they participate in your benefit plan and whether their family is also covered; whether they are officers; and if they own a part of the business.
The requirements are complex. For example, even though most companies don't offer benefits to part-timers who work fewer than 30 or 35 hours a week, you must identify and include in your calculations all employees who work more than 17? hours a week.
The main point is that every employer must do the computations. If you determine that your benefit plans aren't in compliance and refuse to withhold taxes from the paychecks of highly compensated employees who are receiving discriminatory or excessive benefits, your company is liable. Among the penalties: a charge of 28% to 33% of the value of the excessive benefits that are being given.
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Consumer Interest Since next year you will be able to deduct only 20% of the interest you pay on credit cards and consumer loans -- instead of this year's 40% -- you'd be smart to eliminate your consumer loan debts before the end of the year.
Some strategies: fold your consumer loans into a home-equity loan. Or pay off your consumer loans by liquidating investments. You can make new investments with newly borrowed funds and then probably write off that loan interest. While some investment-interest deductions are being phased out, you can still deduct the full amount of investment interest equal to your net investment income. And in addition, until 1991, a portion of the first $10,000 of investment interest that exceeds your investment income is also deductible. You can deduct 40% this year and 20% next year.
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Helping Employees with Dependents For two-income couples with dependents -- either children or elderly parents -- the cost of medical care and day care can be extremely high. Of course, you, the employer, could pay for day care or cover the difference of health-insurance coverage and actual medical costs and fully deduct such costs as a business expense.
But you also can give employees a big financial hand by establishing so-called premium conversion or reimbursement plans. Aside from administrative costs, these plans cost employers nothing -- and could save employees a lot in both federal income and Social Security taxes. That's because employees anticipating such expenses as medical deductibles or co-insurance bills ask employers to deduct a certain amount from their paychecks each year. This portion of their salary -- which is not taxable -- is then distributed to the employee as expenses are incurred.
For dependent-care reimbursement, there is a $5,000 annual limit, but above that employees can take advantage of the dependent-care tax credit as well.
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Jay Brandzel, CPA, is national tax partner of Laventhol & Horwath, and is based in Philadelphia.
TIP OF OF THE MONTH
How to get around the $25 gift-deduction limit
December is a time for gift giving. But whether your recipient is a loyal employee or a valued customer, the most you can deduct for gifts is $25 per person per year. But there are ways around the $25 limit.
* In adding up the cost of a business gift, you may exclude incidental expenses such as monogramming, engraving, and mailing costs.
* You can deduct some business gifts as entertainment expenses; while you can deduct only 80% of your costs, there is no ceiling. So if you give someone two $25 tickets to a ball game, instead of a $25 gift deduction you can take a $40 entertainment deduction.
* Treat items as business expenses instead of gifts. Instead of rewarding your marketing head with a $50 bottle of champagne for signing a new client, share the bottle with everyone in the department, and write the entire $50 off as a "de minimus" fringe benefit.
* You can give an unlimited number of advertising materials, such as pens, calendars, posters, notepads, and matchbooks, provided they cost less than $4 apiece and are imprinted with your name or your company's name.
* Point-of-purchase sales aids such as display racks and signs are not included in the $25 limit.
* Prizes -- cash, say, or a gold watch -- given to employees in recognition of measurable accomplishments, such as productivity, safety, or length of service, are also exceptions to the $25 rule. These awards, however, can exceed $400 only if the IRS considers them "qualified-plan" awards -- a set program, such as an extra two weeks of vacation for employees after 20 years of service, that does not discriminate in favor of top executives or shareholders. (The annual average of these awards cannot exceed $400, but awards to individuals can total $1,600.)
* Grants, scholarships, prizes, or awards given to outsiders in recognition of some special accomplishment are exempt from the $25 limit.
* A legitimate product-testing program that distributes goods you make to employees and customers for testing is also excluded.