Thursday, June 25, 1998

Fringe benefits can be tax boon for business

By COURTNEY PRICE / Scripps Howard News Service

Q: As the owner of a small appliance store with nine employees, I'd like to take full advantage of fringe benefit business deductions as authorized by the IRS. How can I claim every fringe benefit business deduction as a tax advantage?

A: Fringe benefits can be a real tax advantage when used correctly and a great tax write-off for business owners.

Fringe benefits are considered a special tax write-off that are automatically approved as costs of doing business. Your business gets a full tax write-off for any fringe benefits provided, and unless they are considered an unreasonable amount, the IRS seldom raises a red flag when spotted on your tax return.

Some fringe benefits to consider include an employer-provided automobile, a flight on an employer-provided airplane, discounts on commercial airline flights or free flights, vacations, discounts on goods and services, a ticket to a sporting event or other entertainment. Usually, these types of fringe benefits must be claimed by you and your employees as income on personal tax returns.

If your combined personal income and fringe benefits exceed $250,000, you could find yourself in the 39.6 percent tax bracket. Therefore, it is important to evaluate your personal tax situation every time you consider taking any kind of a taxable benefit out of your business. It makes no difference whether it is a cash bonus or a fringe benefit.

Your tax bracket should help you decide whether you want a particular benefit showing up on tax return for that specific year. Always evaluate the tax consequences on your personal income before taking fringe benefits from your business for each operating tax year.

Start by projecting your personal tax bracket for the coming year. Add Social Security taxes and state tax, if applicable. Get a copy of the schedule for individual tax rates set in the current tax code. Then consult your tax accountant before deciding on fringe benefits.

Problems arise when you don't plan on taking fringe benefits or receiving other special allowances. Penalties and interest may be assessed if taxes on these benefits are not paid on a timely basis. As a general rule, penalties arise when 90 percent of the tax is not paid up front by withholding or estimating your personal tax.

There is a class of fringe benefits that is exempted from income. For example, dependent care assistance for dependent children under age 13 can be excluded from income (generally up to $5,000). If you provide this fringe benefit, employees can exclude this amount from income.

Discounts on qualified property or services taken by employees, their spouses, and children can also be an attractive tax-free benefit. For example, an appliance retailer might offer discounts of his store's merchandise to his employees.

Employer-provided transportation and paid parking are other benefits.

(Courtney Price is president of the Entrepreneurial Education Foundation. Send questions to her at 3551 S. Monaco Parkway, Denver. CO 80237.)