Q:

Subject: Employee Fuel Allowances

Hello Kerry,

 

I am working at a client’s office today.  All of his employees drive in from out of town.  He has asked if it would be a good idea for him to provide his staff with fuel allowances.  If so could he cut them a vendor check instead of including it in there payroll and would this be a good write off for his S-Corp by deducting it as employee fuel allowance?       

 

Thanks for your input.

A:

The ability to do what you are proposing – give tax free auto allowances in lieu of taxable wages – became illegal decades ago. 

There are some tax free commuting expenses that employers can provide; such as parking and mass transit passes.  However, paying for driving from home to work is not tax free and has to be included in taxable W-2 wages.

For business related trips, such as misc. errands, the employees can be reimbursed tax free if they turn in the number of business miles driven.  This is what IRS considers an accountable plan.  Those reimbursements, as long as they are no higher than the IRS”s official rate, do not have to be included on the W-2.

The other kind of plan, where a flat amount is provided for an auto allowance without any documentation of actual business miles drive, is called a non-accountable plan.  Those payments must be included in the employees’ W-2s as part of their gross wages.  They can then deduct on their Schedule A their actual business miles.

Kerry

 

Q:

Subject: QB for Personal use

Kerry, I was searching the web and found your site when I did a search on google for “QuickBooks for personal use”.

My wife and I use QB for a couple of business we own, but have refrained from using QB for our personal, be cause we are really not sure how to scale it down rather set it up for just regular home expenses and so forth. Do you have any recommendation other than buying Quicken in addition to QB to set up our personal finances in QB?

Thank you so much for your site, it has GREAT information.

A:

You need to read over the material I have on my website, and you will see that I do not recommend using Quicken.

If you are unincorporated, you should have every single business and personal account you own posted into one QB company file.

You keep straight what is business and what is personal by the use of Classes, as I describe on my site.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Benetrends

Hello Kerry,

I saw your article on Benetrends website regarding their Rainmaker plan. It looks great and I’m looking to do this. However, I’m a little concerned with how I could get usage of the money. I currently already run a franchise under a LLC and also work another job in the computer field. What I want to do is quit my job and focus full-time on my franchise. What I need the money in my 401K for is to survive on (working capital) during the first year of business. I’ve really already taken care of all the start up costs so I won’t need too much investment there. I was wondering what the tax implications are with:

Investing the funds from the Rainmaker plan in to my LLC. Am I able to write a check to my LLC from my new C-Corp as an investment? Then the LLC can do what it wants with the money? Would the LLC have to pay taxes on this money?

Thank you if you are able to answer.

A:

While you really need to pursue this in more detail with the people at BeneTrends and your personal tax advisor, you need to be very clear on exactly what the Rainmaker, or similar, plan entails.

As you hopefully know, taking money out of your retirement account for personal use is subject to ordinary income taxes, plus early withdrawal penalties if you are under 59.5 years old.

Basically, the BeneTrends program allows your retirement account to invest some or all of its cash into capital stock in a corporation that you will operate. The money will be posted on the corp books as capital stock in the equity section of the corp balance sheet. This is not income to the corp.

As manager of the corp, you have a very strict fiduciary responsibility to protect and maximize the value of the investors’ equity and must refrain from personal enrichment at the investor’s detriment. In this case, your investor is your retirement account. This means that the money that is invested into your corp must only be used for prudent and reasonable business purposes. This can often include a reasonable amount of compensation for corp management.

You can check with the folks at BeneTrends to see if their governing documents include any restrictions or limits on how much compensation you are allowed to take for yourself. Likewise, there may be restrictions on the use of too much of the capital investment in corp investments, such as the LLC you mentioned.

If the LLC investment is allowed under the governing documents, it will not be income to the LLC. It will be posted to the member equity account for your corp on the LLC’s books.

As with all tax matters, the burden of proving that you are doing everything properly lies with you. This means that you need to be extra prepared to defend any decisions you make as manger of the corp regarding the use of the funds against any possible IRS accusation of self-dealing or personal enrichment.

Good luck. I hope this helps give you some issues to discuss with your personal professional tax advisor and the BeneTrends people.

Kerry Kerstetter

Follow-Up:

Thank you Kerry. I am just trying to see if this is a feasible plan so I can spend 100% of my time building my new business.

Update:

I recently learned of another company providing a similar service in setting up, SDCooper Company in Huntington Beach, CA.

Contest Winner Declines ‘Free’ Airline Tickets – He doesn’t want to pay the taxes.  It would obviously be a different story if IRS and the State of New York were willing to accept some of his tickets as payment of the taxes; but it doesn’t work that way.