Not Your Fathers Tax GuideFINALconverted

Not Your Father’s Tax Guide

• Printers
• Office furniture
• Copiers
• Medical equipment
• Office space
• Construction equipment

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Strategy Number Five: Timing the Deductions and the
Investments

You should, of course, take the deductions that you are entitled to.
BUT, there are some advantages to forgoing the deduction if it will
benefit you to wait. For example decide if itemizing deductions or
just taking the standard deduction will lower your tax the most. Then,
if you itemize, understand that some deductions have a limit and
can’t exceed the AGI threshold. So, you might lower your AGI by
holding off on giving yourself a portion of your income until a later
date. OR, you can decide if you want a deduction for this current
year, or if it will benefit you to wait until the next year. This is
particularly true if you are already in a high tax bracket, but expect
that next year you will be in a lower one. In this instance, it makes
sense to pay deductible expenses, and give away money to charity in
the immediate future. Many don’t recall that they can post pone or
delay taking deductions until the following year. Amended taxes can
be a good tax strategy as long as they are not abused. This is where
having a very good CPA on your side will save you a lot of time and
trouble.

Secondly, timing your investments is an important wealth building
activity as well. Investing in tax exempt securities is the way to go,
deferring selling off any of the capital assets until you are retired and
in a lower tax bracket. Long term capital gain tax rates are generally
lower than income tax rates, anyway, which means that many of these
investments pay you to hold on to them for a while before selling.
The longer you wait, the better the tax difference.

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October, November, and December are prime months to focus on
your income tax bracket margins. Consider that it is December and
you’ve had a kickass year. In fact, it’s positioned to land you in a
higher tax bracket on your personal taxes. Guess what? It’s time for
your company to postpone the disbursement of funds until the
following year. Combining medical expenses into one year, instead of
spreading it out over a few years, maximizes the deduction.

In essence, you are attempting to: minimize taxable income, control
the timing of income and deductions, and maximize tax deductions
and credits. Part of what makes this doable is effective income and
expense forecasting. If you are self-employed or a small business, and
have several years of information and data, then your forecasts can be
fairly accurate. However, if you are just starting, it is sort of a crap
shoot. You ‘think’ you know what you will make, but you don’t know
for sure.

The goal should be to pay the least amount of tax that you can, and
that is legal. Taking advantage of every possible deduction, no matter
how small you think it is, is a large part of the success of this strategy.
Then, claim every tax credit that comes your way. This requires the
business owner to think ahead and plan accordingly. It also should
have become quite clear, after this chapter, that remaining organized,
and finding a good accounting partner to work with on an ongoing
basis is critical to keeping up. Tax credits, often, are better than
deductions because they almost always reduce your tax bill dollar for
dollar. Deductions are affected by marginal tax rates.

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Minimizing Taxable Income

Reducing the taxable income requires that you understand what
could be considered a deduction, and what can’t be claimed. For
example, there are many deductions that you as the business owner
can claim which employees could not. There are also special rules
that apply to those deductions that include travel expenses, meals,
entertainment, and auto expenses.

With deductions also keep in mind that it might be to your benefit to
not deduct the entire cost of something in the year that you purchase
it. This will give you a lowered tax liability for the immediate year, but
the next year, you won’t get any. The strategy is, if you anticipate that
you’ll be making more in the future, to only take a partial deduction,
then use the rest of it the following years.

Why Tax Credits Rock

Tax credits are directly subtracted from your bottom line. In other
words, whatever your taxes are, tax credits will lower them. Some of
the more favorable tax credits are for hiring the disabled, offering an
employee health plan, and retirement. Another good technique is to
structure a transaction so that the payments received are capital gains,
rather than income. Long term capital gains are taxed at lower rates.

When is it a Bad Idea?

In general, lowering your tax liability is never a bad idea. However,
there is such a thing as bad timing. For example using the delaying of
receipt of income when you’ll be in a higher tax bracket the following

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year makes no sense. And engaging in activities that are likely to red
flag you with the IRS are not a good idea, either.
For example, some common flags would be to try and camouflage a
transaction by calling it a different type of transaction. Trying to
disguise the tax impact of a single transaction by making it look like it
was several is also a very bad idea. The gist of this chapter, in short, is
to legally move your money from a higher taxed area to a lower taxed
area, and to do so in a legal way. Understanding the tax codes,
partnering with a tax coach who knows all of the rules and the
various exceptions, is critical to reducing your overall tax burden.
Because the goal is to build wealth, and you can’t do that if you keep
giving it away each year.

Action Items: To Do
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CHAPTER 9

DPAD: Domestic Production Activities Deduction
Now that you know what it stands for, the big question is: What does
that mean? Or more importantly, what does it mean for your bottom
line?
First, a little history, if you’ll indulge me. It is important to
understand that in the past the US developed tax incentives to
promote exporting activities. But, the World Trade Organization
decided that these incentives were horribly slanted to give the US an
unfair advantage over other countries. Thus, DPAD was created in

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2005 and promotes production of goods inside of the US, which in
turn increases employment, and decreases the amount of jobs that
leave the country. If you don’t have employees, then DPAD won’t be
something that will be of benefit to you. However, if you currently
don’t have employees, but plan to one day include them as part of
your overall strategic plan to expand or grow your business, then read
on.

Do You Qualify?

Congress offers a myriad of deductions and tax loopholes for small
business owners because they want to promote a healthy economy.
This is because they know that small businesses are the backbone of
the economy. Most have never even heard of DPAD, or if they have,
one of the key reasons that I hear from my clients (when asked why
they didn’t take advantage of it) is that they thought it was too time
consuming, or they didn’t qualify for it. Lowering your taxes by a
potential 9% would make it worth anyone’s while I would think.
Most of the reasons people don’t pursue this deduction is because it
is wrapped in so much legal jargon and tax-ese that it can be difficult
to understand. Fortunately, this is where having a good tax partner,
or better yet, a certified tax coach, comes into play, most definitely.

DPAD 101

DPAD has some very strict guidelines as to who does, and who does
not, qualify for the deductions. The bottom line is that whatever the
net income is from production activities, you can deduct 9% of that
as taxable income. So, if your company made $100k, then you would

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Corp shareholders (with more than 2% of the company), and
partners in a partnership. This works regardless of whether you took
that out as an individual, or you had the business pay for it.

Here’s a good example:

Juan is a sole proprietor, who on average pays about $10,000 annually
for his health insurance. Last year his business made about $50,000
profit. Juan take deduct that entire $10,000 dollars from the gross
income, and since his federal/state income tax rate is 30%, this will
save Juan nearly $3,000 in taxes per year. However, Juan can’t deduct
the premiums from income when he figures his self-employment
taxes. The only catch, here, is that you can only deduct as much as
you earned from the business. Plus, if you have more than one
business you can’t get creative and combine the incomes for a greater
deduction. It also goes out the door if you are currently receiving
health care insurance from another employer, even if you still have
co-payments and high premiums.

A Better Plan of Attack

A better strategy, for many, is to deduct the health insurance
premiums as a business expense, having the business pay for it. The
catch, of course, is that you have to have employees for a business to
offer it to them. So, if you haven’t yet declared yourself or your
spouse as employees, do that first.

The way most get around this is the nice little loophole that Uncle
Sam left us. Simply hire your spouse, then have the business offer

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them healthcare (family healthcare), and voila….you’re covered and
it’s a business deduction. This insurance will also cover your children
until they are age 27, even if they aren’t any longer your dependents.

I had a recent client; we’ll call him Joe, who had a very successful
financial consulting business. His wife, Linda, worked as his office
manager. When he came in, he was lamenting the fact that healthcare
costs were eating him alive and wondered if there were any solutions.
There was! I told him to offer Linda health insurance as part of her
employment package (along with a salary). Now, not only are they
both covered, but their two kids are as well. Plus, Joe gets to write it
off on his taxes.

The policy premiums that we selected were about $10,000, so he can
deduct that from his overall taxable income at the end of the year. He
can not only deduct that $10,000 from his gross profits of $100,000
at the end of the year, but he can also apply that to his personal taxes
as well. All in all, Joe is going to save $4,500 in federal taxes, alone, by
setting up his healthcare needs this way.

You will have to be sure, if you don’t have someone preparing your
taxes for you each year (and you REALLY should), to NOT take the
health insurance deduction for self-employed people that is on the
tax form. All in all, you are so much better off deducting your
premiums as a business expense, as it works for both the business as
well as personal. The self-employed health insurance deduction
doesn’t allow for this.

Of course, like with most things governmental…there are some

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catches. First, if you are an S-Corporation, a partnership, or a LLC
(with multiple partners), then the government will scrutinize WHO is
really paying for the healthcare. The policy, itself, can be taken out in
anyone’s name, but the money trail MUST go back to the business
for the deduction to be legit. Plus, these premiums must be reported
correctly for tax purposes.

Here are some real-world examples. Maybe one of them sounds like
you.

Situation One:

Your business secures a health insurance policy, taken out in the
business’s name, which will cover the owner (more than a 2%
shareholder), and any other employees. This business makes all of the
payments for the premiums, and the business reports the premiums
as part of gross wages on the W-2s. In the case of a partnership, the
guaranteed income has to be listed on the Schedule K-1, or in the
case of an LLC, guaranteed income on the schedule K-1.

So…in this situation, each member of the company can take the
deduction on the 1040, line 29. The exception is the more than 2%
shareholder (owner) of the S corporation would be included on the
W-2 already. And no…if you’re single you can’t hire someone
claiming that they are your spouse. It has to be real. And, you can’t
hire your child and expect to play out this scenario either, because a
child’s policy can’t cover other family members.

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Situation Two:
You are a greater than 2% shareholder in the business and you get a
policy in YOUR name. But, you have the business make all of the
premium payments; the business reports the premiums as part of the
gross wages on your W-2. This is much the same as Scenario One in
that as long as the money trail leads back to the business, and there is
no discrimination, you are golden.
Situation Three:
You get a policy in your name to cover not only yourself, but your
family. In this case, you would pay all of the monthly payments, but
then the company would “reimburse” you for those premiums paid.
This would be reported on the W-2 as part of the gross wages.
In all of these plans, you CANNOT claim health insurance
premium deductions if you file Form 1040A or the 1040EZ.
Good News for Small Businesses
Right now, and of course it could change, small businesses that have
fewer than 25 employees can enjoy a tax credit of up to 50% for your
contribution toward your employee’s health insurance premiums. If
you have fewer than 10 employees, the tax credit is highest. So, in
essence, the smaller you are, the bigger the credit you’ll be offered.

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In order to qualify, the government stipulates that you meet the
following criteria:

• Have less than 25 employees
• Pay those employees less than $50,000 a year
• Pay at least half of the cost of the insurance premium costs

(for full time employees)
• Have purchased a group insurance plan using SHOP

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So What is SHOP?

SHOP stands for the Small Business Health Options Program. It is
part of the affordable healthcare marketplace and is there for
employers who want to provide healthcare policies for their
employees. The catch is that you have to actually HAVE employees
(no you don’t count by yourself), and you have to have fewer than 50
full time employees. The nice thing is you can offer this healthcare
coverage to your employees any time of the year.

As of now, you don’t have to offer coverage to part time employees
(less than 30 hours a week).

The Health Savings Account (HSA)

The Health Savings Account (HSA) is very useful when it comes to
financial planning. Basically, this account allows the business owner
to put money aside for the express use of using it for future medical
expenses. What’s nice about this is that the funds that you put into it
will accrue and grow tax free the longer you leave it in there. Thus,
the HSA doubles as a type of investment account as well.

And, it’s really easy to establish an HSA. Most banks offer one. But
you have to take out a high deductible insurance policy. The
government defines this as ($1250 individual, $2500 for family). This
is set up by you, the individual, not the company, though the
company can pay into it as part of your employment package. The
money placed into an HSA is NOT taxable, so it becomes an instant
tax shelter. The government knows this and as a result, will only

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allow so much to be sheltered into it in any given year. Currently, that
amount for a family is $6500 and $3300 for individuals.

What are HSA Accounts Good For?

Besides the fact that they are good tax shelters, they can help defray
the costs of healthcare. Prescriptions, co-payments, or procedures
not covered by your policy can all draw money from this account.
Many business owners particularly like having an HSA because it
means that they are not only getting to write off their healthcare
premiums, but can shelter more money into the account. Plus, there
are other advantages:

• You decide how much to put in each month (if you need to
skip a month, you can)

• You decide how to use that money

• The company can contribute to the account, but only YOU
as the employee own the account

• Unused money simply stays in the account and accrues
interest

• It is not taxable

There are a few disadvantages that I’d want you to know about.

• Illness and accidents often happen without warning and
adequately budgeting for the health care expenses is simply a
guess

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• It requires you to diligently contribute to the fund

• If you are already ill, or have a serious illness, it simply might
not be possible as opposed to those who are younger and
healthier.

• HSA money can’t be used to pay premiums

• Can’t withdraw it for non-medical reasons (or you will be
taxed on it as income)

Sticky Wickets and All That

Setting up a health savings account is not difficult, but the
government has strict rules. You have to be under age 65, and you
have to have a high deductible healthcare policy. Most of the bronze
and silver plans on the marketplace currently meet these criteria.
Your spouse, if they use your insurance as a secondary insurance,
must also be enrolled in a high deductible plan. If you are the holder
of the policy, yourself, then it has to be your PRIMARY source of
insurance. However, if you still have a ‘day job’ and they provide
dental, vision, or long term insurance, having these from your
employer doesn’t preclude your ability to start up an HSA. The high
deductible health insurance plans, in short, are those plans that have
very high out-of-pocket rates that must be paid per year before
insurance starts to kick in. What’s nice is that often these higher
deductible plans have lower monthly premiums. Look for plans that
have at least $1300 deductible/single, and $2600/family. HSA
accounts can be used to offset those higher deductibles. Each bank’s

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HSA is set up a bit differently, so sit down with your banking
institution to find out their rules.

Medical Expense Reimbursement Accounts

Many businesses opt to go the reimbursement route. This is
advantageous if you have a larger number of employees, but not so
much if you have just a few. Many small businesses opt to go this
route in lieu of messing with the healthcare marketplace policies. In
this instance, the employer receives an itemized list of employees’
medical expenses and then, at a designated time, reimburses them for
those medical expenses. If you opt for this then you are required to
create a plan that explains the value employees are receiving, what
sorts of benefits, and what the MERP will cover. This is where
having another set of qualified eyes on the document will be
invaluable. I frequently assist in creating or assisting in the creation of
these types of documents. That’s because there are different ‘flavors’
of MERPs.

HRA: Health Reimbursement Arrangement

This plan reimburses employees tax-free for approved medical
expenses. Those dollars given to an employee as a reimbursement are
NOT taxable, so it doesn’t pad that adjusted gross income (AGI).

HRP: Healthcare Reimbursement Plan

This is often called the Section 105 Plan, and is an employer-funded
premium reimbursement program. This basically reimburses that
employee for the premiums spent on obtaining healthcare. These are

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also not considered taxable dollars.
Flexible Spending Account (FSA)
These types of accounts are also tax-advantaged, but they allow for
the employee’s paycheck to have a certain amount deducted each
time going into the account to go toward qualified healthcare
expenses.
During the course of the fiscal year, many insurance companies will
assess their financials. If they find that they have not spent at least
80% of their premium dollars on medical care (as opposed to
administrative costs), then they are required by law to offer rebates to
group policy holders. If this occurs, you’ll need to decide whether
this will be considered a plan asset and then distributed in some way
to the employees, or whether it will be placed into other accounts.
For more information on this, you should visit the Medical Loss
Ratio rebate page at the IRS’s official page.
Healthcare Strategies for Small Businesses

When I consult with my
clients, I like to cut to the chase, and then offer some insight. The

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bottom line, here, is that you need healthcare. Don’t think that it is
optional. It isn’t. Secondly, there are ways to offset the premium
amounts that you would be paying each month. Though I always
customize a plan for each client, a good basic ballpark strategy is as
follows:

Step One:

Hire your spouse as an employee, and set up your HSA (or
a MERP) for both of you. These banks on the fact, pun intended,
that you will be using those funds expressly for medical expenses.
You will have to check with your individual bank to see what their
rules for withdrawal are. Some require documentation to be provided
annually, while others have less stringent rules. It does pay to shop
around and compare HSA accounts.

Step Two:

Have your spouse purchase a health care plan that has a
higher deductible (family policy). They must make less than 50,000 a
year, and be an actual employee of YOUR company. Special rules do
apply for S Corporations, so make sure you do things in the

right order.

Step Three:

If you can, use the ACA tax credit so that the monthly premiums are
even lowered still.

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Step Four:

Use a MERP in conjunction with the HSA for maximum
deductions.

When a Tax Advantage isn’t an Advantage At All

This may seem very weird coming from me, but just because
something is going to give you a massive tax break at the end of the
year, but requires you to overspend on the healthcare product, is just
bad math. I kid you not, I have had clients who have invested in
purchasing a larger home than they really wanted or needed simply to
get the larger mortgage interest deduction. You can go broke trying
to ‘save money’, if you aren’t careful.

The same thing applies to healthcare insurance. Let’s say you are in
the 20% tax bracket (which gives you the 20% discount). And, let’s
say, for the sake of argument that your higher deductible premiums
each month are around $500. After taxes, your cost per month is
really $400, which sounds great. Okay, same scenario, only you have a
low deductible plan that runs you $700 per month, so after taxes it
would be $560. So, technically, yes, you’re saving more money off of
the $700 dollar policy, but in the long run, you’re still paying $160
bucks more a month anyway. That’s terrible math. If you’re like most
business owners, you’d prefer to have lower monthly expenses than
larger expenses and deductions.

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Assess Your Situation

If you were sitting right here, right now, across the desk from me, I
would take out a sheet of paper and we would start assessing your
situation. In an abbreviated form, through the auspices of this book,
we can do the same thing. Ask yourself these sets of questions:

What type of business entity are you?

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What are the rules or regulations surrounding your particular business
entity when it comes to healthcare?

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What are the possibilities for hiring your spouse?

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If you have no spouse, then which of the healthcare options works
best for you?

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Realistically, what can you afford each month on premiums?

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Go to the Healthcare Marketplace and sign up for SHOP. Then
locate and compare five top plans. Write them below:
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Locate five banks in your area that offer Health Savings Accounts.
Compare their plans.
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CHAPTER 11

One of the most often asked questions when I give seminars is:
“How can I use my corporation to get tax free money?” The short
answer is quite simple…diversify the many ways that you enjoy the
fringe benefits. These fringe benefits can include everything from
medical benefits to employee discounts on services and goods. The

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beauty of owning a corporate entity is that there are numerous ways
to shelter pre-tax dollars, or to gain back at the end of the year, tax
credit or deductions.

Understand, the IRS has very strict rules governing the creation and
implementation of ‘said’ benefits and fringe offerings, but with the
right advice, the right structure, and some due diligence, there’s no
reason you can’t enjoy the same benefits and tax free money as the
‘big boys’ do.

This chapter (and the next) go over all of the many ways that you can
absolutely have tax free benefits with no extra cost added. Definitely,
take advantage of the free notes space provided as you’ll want to jot
down the areas and fringe benefits that you’d like to explore. As
always, if you have questions about whether a benefit or tax free
strategy would be right for you, a consultation with your certified tax
coach is crucial.

This book is meant as a general overview, and actionable ‘take with
you’ guide, but believe me, another entire book could be devoted to
JUST this topic, alone. What I will do, however, is give you a very
good overview of what would be needed in order for you to establish
the benefit and tax free status so that the IRS can’t shoot holes in it (I
help you bulletproof it). When applicable, I’ll also tell you anything
that might be a type of setback for each benefit, especially in the way
of discrimination, believe it or not.

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Most of these fringe benefits really pertain to small business owners,
but that’s not to say that larger companies couldn’t benefit from
them. There are just different rules that apply for the ‘big boys’.
Lastly, I would urge you to pay attention to those benefits that are
available to not only the employees, but also the employers. Those
that have limitations as far as what can be offered to stockholders or
the owner, and those that are available only to certain types of
corporate ownerships. If you even apply a few of these tax free tips
I’m about to divulge to you, you will have at the very least, paid for
your copy of this book (and had a lot left over).

Use Property, Services, Equipment Tax Free

This gets the number one spot on my list because it works for so
many different types of businesses. This is also sometimes called the
working-condition fringe benefit. This is loosely defined as property
or services that are given to an employee by the employer that would
have been deductible or depreciated as a business expense, had the
employee actually paid for it instead of receiving it from the
employer. This particular rule only applies to employees, though, so
employers or the employer’s family aren’t eligible to enjoy this
benefit.

What it Means

There are a number of ‘types’ of property or services that fall into
this broad category. Here is a brief list, just to give you an idea:

• Computer equipment

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• Copy machine
• Fax
• Cell phone
• Business materials (magazines)
• Memberships to associations or professional organizations
• Job placement assistance
• Business related (or industry related) books

Why would you want to offer these as fringe benefits? Though it is a
matter of semantics, to the IRS there is a world of difference between
an employee purchasing these for himself and claiming a deduction
and a company providing these as benefits of employment and taking
the deduction. As a business, the expense is FULLY deductible,
whereas an employee claiming them as an itemized deduction would
be subject to depreciation and/or phase-out, and that is based on the
premise that you’d exceed the threshold of 2% of your AGI. BUT, if
the employer offers these to you as the employee, then they are fully
deductible by the business, and are not taxed to either the business or
the employee. No thresholds to keep in mind, and no phase-outs.

Here’s another example:

Kevin operates a digital marketing company. It operates as an S
Corporation. Kevin wants to take advantage of the different home
based and small business publications out there, and also subscribe to
special services that are available for PR and Marketing professionals.
If his business pays for these, then Kevin can receive these tax free.

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In these instances, too, discrimination is allowed by the IRS toward
employees. In other words, Kevin can offer this benefit to his
employee (himself) but not to any of the other junior network
marketers that work in his firm. This is sort of like bigger companies
who offer work cell phones to their top execs but the rest of the
company have to use landlines.

Incidentally, even independent contractors can be offered work
related fringe benefits under this clause. The only exception to this is
that they can’t be involved in product testing or parking. This is also
true of any other employee who is receiving fringe benefits. This is a
wonky law and no one I know understands WHY it is still on the
books. But, there you have it….it just is.

Types of Property I Can Use

Make a list of property, services, or goods that you could provide,
which meet the criteria.

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Product Testing By Employees

So what’s product testing all about, anyway? Basically, it is pretty
straightforward as to what it is. Employees are given certain products
to try out and evaluate before they are offered for sale to customers.
However, if you aren’t careful, your employees will be taxed on those
products, even if they were doing it as a part of their job working for
you. So, the IRS states that there is a list of criteria that must be met
in order for those products to be considered tax free:

• The employer doesn’t discriminate in the dissemination of the
products against higher paid employees (unless the company
can show very good reason, and believe me, most times you
can’t).

• The product would be a normal expense of the employer,
anyway.

• There are reasons why the product has to be tested offsite.
• The products are provided for the express purpose of being

tested and evaluated.
• There are strict limits on personal use.
• Employees can’t turn around a sell, or resell the product.

They have to turn the product back in.
• The employee must have some sort of reporting requirement

on the product (reports, online evaluation surveys, etc.)
• A reasonable amount of time is given to the employee to test

the product.

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Services to Employees

Sometimes a company doesn’t have products to offer to employees,
but they do have services. These services must be offered to
customers in the course of business, and the company doesn’t really
incur too much cost in offering those benefits. Here’s a good
example: Suppose that Shakespeare & Co offers airfare and lodging
for customers as part of their business. If there happens to be some
free seats on the plane, or some of the rooms that were booked are
still vacant, then the business can offer those tax free to employees.

Be careful. There are instances where this could blow up in your face
if you aren’t careful. Consider the case of We Fixit Computer
Company. Shelly works for them and her computer breaks down. She
asks Bill in repairs to fix it for her. He does, and she pays him the
company’s cost of $100 dollars. Unfortunately, that’s not the price
that’s offered to the public, which is around $750. The IRS will hit
her with taxes on the balance, even if she reimbursed the company
the $100 dollars for fixing the computer. The problem, here, is that
Shelly’s repair actually did cost the company $100, which voids the
‘no cost’ rule.

So, the takeaway here is that the company has to offer these services
only if they don’t directly result in out of pocket expenses for the
company, itself.

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Day Care Assistance Tax Free

If this is handled correctly, some companies can offer as much as
$5000 to employees in childcare assistance, and it would be tax free
income for the employee. Many employers, in order to attract high
quality employees, will offer the fringe benefit of subsidized
childcare, or even free daycare at the workplace. The IRS only
stipulates that business deductions be as a normal and ordinary
expense of doing business. So, the expense only needs to be the type
of expense that other businesses and employers offer to their
employees. And, it is considered necessary if your business can show
that offering it is helpful to the business (like keeping talented
employees.

There are stipulations, of course. It’s the IRS….so of course there are
criteria that must be met. The amount that a business can deduct
depends on the type of benefits that are already provided. If you have
onsite daycare then you can literally deduct everything that is
involved in the running of that daycare. This expense, as far as the
employee is concerned, is not taxable, and won’t be figured into their
AGI, as long as the benefit is offered to all eligible employees (no
discrimination allowed), and the benefit aside from having a happier
worker, is that the money used to secure the daycare isn’t considered
a form of payment to the employee, so you don’t have to do
withholding or social security taxes.

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The IRS currently offers employers and companies up to $15,000 tax
credit for those who operate a childcare facility for their employees.
The tax credit is better than the deduction any day, so evaluate your
ability to offer this. It may very well be worth it all the way around. It
is a win/win situation for most involved.

Daycare Ideas

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Medical Plans

We’ve already discussed many different types of healthcare offerings
that can offer a business significant savings, as well as the employees.
It bears mentioning in this chapter as well because there are several
fine tuning aspects that need to be covered.

A very good overall strategy is to have insurance offered by the
company to employees. BUT, also set up a MERP (medical expense
reimbursement plan) for your employees as well. This will cover the
copays and out of pocket expenses that they many incur which are
not covered by the insurance plan. This not only helps out the
employee, but it also offers the business entity a tax deduction.

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Bulletproofing it

• The employer actually must offer a health insurance plan.
• There must be a reporting procedure in place for the

employee to submit a verifiable documentation of medical
expenses for reimbursement.

How to Set up a MERP

A MERP (medical expense reimbursement plan) covers all those
medical expenses that the regular health insurance doesn’t. This can
be anything from mileage to and from the doctor’s to co pays, to
deductibles, hearing aids, seeing the chiropractor, over the counter
meds, or even cosmetic medical or dental costs (braces or laser
treatments). Many mistakenly believe that this IS a health insurance
account. It is not. Others think that it operates like a HSA (health
savings account). It does not. There are very specific rules governing
MERPs, which I’ve outlined in earlier chapters. For the purposes of
this chapter, you should just recall that a MERP is created in addition
to other accounts, and that the MERP can only be offered by the
company if the company is also offering it to their other employees
(no discrimination is allowable in this regard). A MERP can usually
be set up at any major banking institution.

Plans for Medical Fringe Benefits

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Disability Insurance

Disability insurances is useful for two reasons. First, it covers a loss
of income if you become disabled as a result of an accident or
prolonged illness. Secondly, it covers the permanent loss of a major
body part or organ. Payments that are made as a result of this are tax
deductible for the company, and ends up being tax free for the
employee making the claim as well. This means that even though the
employee will receive the money, it is not going to count as income at
tax time.

A good example of this is Bob who works at a Button Factory. One
day Bob takes a button to the eye and loses it. The $200,000 dollars
that he is paid as a result becomes a deduction for the company, and
it goes to Bob tax free.

Other Types of Disability

So, consider that disability insurance is there in case a person is so
injured or ill that they can’t work. This is why it’s a good idea to have
disability insurance. Companies have two basic options when it
comes to disability premiums that they pay to the insurance company.
They can be considered tax free to the employee, or taxable. It is all a
matter of where your tolerance is. For example, if you go the tax free
route for the employee, then the benefits become taxable when and if
the employee is paid on the policy. BUT, if the employee is taxed on

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the premiums, or pays for them himself, then the benefits are not
going to be taxed.

Here’s a good example: Business is Us, Inc., offers disability
insurance to its employees as a tax free option. One of the employees
is in a car accident headed to the Grateful Dead concert. It is so bad
that she misses work for almost six months while she’s in recovery.
In this instance all of those payments to her are completely taxable
because the initial premiums were tax free.

Disability Insurance Companies to Contact

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Bulletproofing It

The IRS is very particular in upholding the rule that an employee
who has paid the total premiums for that coverage (in that policy
year) where he or she had a disability and received payments is not
liable for taxes, even if the employer paid the premiums in earlier
years. So, what this means is that all disability payments that the
employee got would be allocable to his payments and therefore are
not to be taxed.

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In other words, it is a very good strategy to have the company deduct
the premiums and offer them as tax free benefits for employees. But,
in the year that the disability occurs, treat the premiums as taxable for
the employee, which will make those benefits tax free.

Here’s an example of what I’m talking about. I had a client, whom
we’ll call Jasmine. She was injured in a bus accident. If the year of the
injury she had been taxed on the premiums paid by her employer,
then those benefits are tax free.

You should know, however, that there are catches for S Corporations
and self-employed taxpayers, especially if you are more than a 2%
shareholder. So, you would not be able to deduct the premiums. But
the benefits ARE considered tax free when, or if, they are ever
needed to be paid out.

So the takeaway here is that you should provide some sort of
disability coverage, and should deduct the premiums as well as treat
them as a tax free offering to the employee. If the benefit goes to an
employee for the loss of a limb it will always be tax free. If the
benefit is for the loss of income while recovering, then retroactively
treat last year’s premiums as income, so that the benefits will be tax
free.

What is De Minimis and How Can It Save You BIG?

Discrimination, in many instances, is viewed negatively, but there are
instances where the IRS doesn’t view it with contempt. As long as
the value of the goods, services, or property is small enough that it

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doesn’t require its own accounting, it is allowable. Also,
discrimination is allowable if it isn’t done too often. Sounds a little
vague, doesn’t it?

The two words to bear in mind are “infrequent” and
“inconsequential”. Here are some examples that would NOT qualify.

Say there is a small corporation that offers income opportunities.
This company offers a onetime payment of $1000 per worker, so this
is NOT deemed inconsequential and is taxable.

But, the same company covers transportation costs for employees
that live outside of a certain mile radius. This is provided monthly as
a reimbursement. This is NOT considered infrequent. So it doesn’t
qualify either. This is taxable as income for the employee.

• Things that WOULD qualify are ‘little’ things like:
• Theater tickets as a bonus
• Use of the copy machine or other office equipment for

personal use (less than 15% of the time).
• Weekly coffee, donuts, or snacks
• Holiday gifts
• Free drinks in the breakroom
• Having a coworker type something up
• Bus passes (as long as they are less than $21 dollars)

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De Minimis Ideas

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Additional De Minimis Deductions Possible

If very strict rules are followed, even the occasional meal stipend can
be deducted. Suppose that you sent some employees out to a
convention. You provide them with a meal stipend to be used while
they are there. The IRS allows this if the following criteria are met:

• The money offered is not a regularly occurring activity.
• The money offered allows the workday to go longer than

usual.
• The money offered allows the employee to work longer.

The amount has to be reasonable, too. So, no $100 a meal stipends.
Plus, if you’re self-employed and are registered as that entity,
sorry…no soup for you. This benefit can’t be offered more than
once a month or the IRS deems it too frequent to qualify.

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Employee Discounts

In a nutshell, any service or product that you already provide as a
matter of course of doing business, you can also offer to your
employees, but at a discounted price. For example, supposed your
company produced baby wipes and diapers. You offer a 50% off
discount to employees on those products as a benefit of working
there. The employees receive these tax free (not considered as part of
their taxable income). There are exceptions (of course). You can’t
give employees money, real estate, stocks/bonds, or commodities.

Exceptions to be Aware Of

On top of the aforementioned exceptions, there are some limiting
discounts thanks to Congress. Some industries are limited as to how
big of a discount they offer to their employees. You’ll have to look
up your particular industry because it varies from one to the other.
For example, if you provide a service, such as a travel service, then
you are limited to only offering a 20% off discount to your
employees.

Also, you can’t discriminate with these discounts. They have to be
applicable to all employees regardless of their position in the
company. No executive perks. There is a little bit of wiggle room on
this one, though. There are some limiting factors, such as you can
stipulate that a worker has to have worked there more than a year
before they qualify. You can also state that it is for only full time
workers, and those who are over 21. Some limit access to those who

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