DOCSLIB.ORG

CPA's Guide to Benefit Plans for Small Business

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
CPA's Guide to Benefit Plans for Small Business University of Mississippi eGrove American Institute of Certified Public Guides, Handbooks and Manuals Accountants (AICPA) Historical Collection 1999 CPA's guide to benefit plans for small business James R. Hamill Follow this and additional works at: https://egrove.olemiss.edu/aicpa_guides Part of the Accounting Commons, and the Taxation Commons A CPA’s Guide to Benefit Plans for Small Business James R. Hamil, CPA, Ph.D. A CPA’s Guide to Benefit Plans for Small Business James R. Hamil, CPA, Ph.D. NOTICE TO READERS A CPA's Guide to Benefit Plans for Small Business does not represent an official position of the American Institute of Certified Public Accountants, and it is distributed with the understanding that the author and publisher are nor rendering legal, accounting or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Copyright © 1999 by American Institute of Certified Public Accountants, Inc., New York, NY 10036-8775 All rights reserved. For information about permission to copy any part of this work for redistribution or for inclusion in another document or manuscript, please call the AICPA Copyright Permissions Hotline at 201-938-3245. A Permission Request Form for emailing requests is available at www.aicpa.org by clicking on the copyright notice on any page. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, Harborside Financial Center, 201 Plaza Three, Jersey City, NJ 07311-3881. 1234567890PP 99 ISBN 0-87051-255-2 FOREWORD This book covers the full range of popular benefit and welfare plans currently used by closely held businesses to assemble attractive, tax-wise employee compensation packages. Its objective is to enable CPAs in public practice and industry to advise closely-held-business clients or employers on how to enhance employee compensation in the most tax-effective manner. The fringe benefits reviewed have been chosen and carefully tailored to match the typical closely held business' organization, financial situation, and characteristics. Discussion of compensation strategies employed by larger corporations, such as stock option plans, is avoided. We would like to thank James R. Hamill, CPA, Ph.D. of the University of New Mexico, Albuquerque, NM, for writing this book. We would also like to thank Robert J. Dema, CPA, President, CPI Qualified Plan Consultants, Inc., Great Bend, KS, and Henry A. Smith III, Esq., Smith & Downey, Baltimore, MD, for their technical reviews of the course on which this book is based. Mary Schantz Vice President, Product Development. TABLE OF CONTENTS PAGE Chapter 1—Cafeteria Plans...................................................................................................................................1 Chapter Overview......................................................................................................................................................1 Introduction................................................................................................................................................................ 1 Definition............................................................................................................................................................. 1 Cafeteria Plans in Practice..................................................................................................................................1 Advantages of a Cafeteria Plan..........................................................................................................................2 Disadvantages..................................................................................................................................................... 3 Participation and Election Provisions......................................................................................................................4 Who Can Participate in a Cafeteria Plan?.........................................................................................................4 How the Choice of Benefits Is Made................................................................................................................ 5 Permitted Benefits..................................................................................................................................................... 9 Benefits That Can Be Offered...........................................................................................................................9 Benefits That Cannot Be Offered....................................................................................................................10 Flexible Spending Accounts............................................................................................................................ 11 Family and Medical Leave Act........................................................................................................................ 12 Premium Conversion Plans: Pre-Tax Only?.................................................................................................. 13 What Benefits Do Employees Want?..............................................................................................................13 Cafeteria Plan Requirements...................................................................................................................................14 Consequences of Failing Plan Requirements ................................................................................................14 Written Plan Requirement................................................................................................................................14 Plan Cannot Discriminate.................................................................................................................................15 Highly Compensated Discrimination Test..................................................................................................... 15 Key Employee Concentration Test..................................................................................................................17 Reporting and Disclosure Requirements...............................................................................................................18 Specific Filing Required...................................................................................................................................18 Time and Manner of Filing.............................................................................................................................. 18 IRS Notice 90-24.............................................................................................................................................. 18 Department of Labor Requirements................................................................................................................19 COBRA Continuation.......................................................................................................................................19 Chapter 2—Nonqualified Deferred Compensation Plans.............................................................................21 Introduction..............................................................................................................................................................21 Definition...........................................................................................................................................................21 Advantages and Disadvantages.......................................................................................................................21 General Tax Treatment...........................................................................................................................................22 Code Section 83................................................................................................................................................ 22 v FICA Treatment................................................................................................................................................24 Constructive Receipt........................................................................................................................................ 24 What Benefits are Commonly Provided?.............................................................................................................25 Incentive Aspects..............................................................................................................................................25 Supplemental Benefits..................................................................................................................................... 26 Retirement Inducements.................................................................................................................................. 26 Link With Section 401(k) Plans.......................................................................................................................26 Funded and Unfunded Plans.................................................................................................................................. 26 Economic Considerations................................................................................................................................ 26 Tax Considerations...........................................................................................................................................27
Load more

Recommended publications
  • Rethinking Tax: the Shift to Indirect Tax
    Rethinking tax: The shift to indirect tax The global tax landscape is going through a period of fundamental change. Governments are now rethinking how taxes are levied. Changes have been triggered by the rapid spread of technology, new supply chains, debt pressures, and an increased scrutiny of multinational tax practices. More than ever, tax is a top priority for businesses, as sweeping changes, brought in through the Organisation for Economic Cooperation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) recommendations, transform the way they operate. Whilst corporate tax avoidance continues to grab system. Just next door, Bangladesh has plans to headlines, some of the biggest reforms are in fact implement a new VAT in July. The Middle East occurring within indirect tax. This year, two of are also expecting momentous changes. In a move the world’s most populous countries – China and to generate additional revenue and diversify the India – are expected to transform their indirect tax economy, the Gulf Cooperation Council (GCC) systems. China is set to complete the final stage countries – Saudi Arabia, Kuwait, the United Arab of its Value Added Tax (VAT) reform, whilst Emirates, Qatar, Bahrain, and Oman – are expected India is expected to introduce its long-awaited to levy VAT from 2018. comprehensive Goods and Services Tax (GST) Rethinking tax: The shift to indirect tax Countries transforming their indirect tax regimes or introducing VAT/GST China India Bangladesh Puerto Rico Kuwait Bahrain Qatar UAE Saudi Arabia Oman These upcoming changes are all off the back of The shift to indirect tax will transform the way Malaysia’s successful GST regime introduction businesses operate within these countries.
    [Show full text]
  • The Theory of International Tax Competition and Coordination
    CHAPTER 5 The Theory of International Tax Competition and Coordination Michael Keen* and Kai A. Konrad†,‡ *International Monetary Fund, Fiscal Affairs Department,Washington DC 20431, USA †Max Planck Institute for Tax Law and Public Finance, Marstallplatz 1, 80539 Munich, Germany ‡Social Science Research Center Berlin, Germany Contents 1. Introduction 258 2. Uncoordinated Actions 262 2.1. Workhorse Models 263 2.1.1. The Zodrow, Mieszkowski, and Wilson (ZMW) Model 263 2.1.2. The Kanbur-Keen (KK) Model 275 2.2. Sequential Decision Making 278 2.3. Pure Profits and International Portfolio Diversification 282 2.4. Tax Competition with Multiple Instruments 284 2.5. Vertical Externalities and the Strategic Role of Internal Governance Structure 285 3. Coordination 288 3.1. Asymmetries and the Limits of Harmonization 289 3.2. Minimum Tax Rates 289 3.3. Coordination Among a Subset of Countries 293 3.4. Coordination Across a Subset of Instruments 295 3.5. Dynamic Aspects 296 3.5.1. Infinitely Repeated Interaction 296 3.5.2. Endogenous Savings and Time Consistent Taxation 298 3.5.3. Stock Effects and Agglomeration 302 4. Broadening the Perspective 303 4.1. Bidding for Firms 303 4.2. Preferential Regimes 305 4.3. Information Exchange and Implementation of the Residence Principle 308 4.4. Tax Havens 311 4.4.1. Which Countries Become Tax Havens? 311 4.4.2. Are Tax Havens Good or Bad? 312 4.4.3. Closing Down Tax Havens 314 4.5. Formula Apportionment 315 4.6. Political Economy and Agency Issues 318 4.6.1. Tax Competition and Leviathan 318 4.6.2.
    [Show full text]
  • Nber Working Paper Series Inflation and Taxation With
    NBER WORKING PAPER SERIES INFLATION AND TAXATION WITH OPTIMIZING GOVERNMENTS James M. Poterba Julio J. Rotemberg Working Paper No. 2567 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 April 1988 We are grateful to Barry Perlstein for research assistance, to Greg Mankiw, Lawrence Surmoers, members of the NBER Taxation Group, and especially David Rosier for helpful comments, and to the National Science Foundation for financial support. The research reported here is part of the NBERs research programs in Economic Fluctuations and Taxation. Support from The Lynde and Harry Bradley Foundation is gratefully acknowledged. NBER 1orking Paper #2567 April 1988 INFlATION AND TAXATION WITH OPTIMIZING GOVERNMENTS ABSTRACT This paper extends and evaluates previous work on the positive theory of inflation. We examine the behavior of governments concerned solely with minimizing the deadweight loss from raising revenue through inflation and tax finance. We show that both governments that can commit to future policy actions, as well as those that cannot precommit, will choose a positive contemporaneous association between inflation and the level of tax burdens. We examine the empirical validity of this prediction using data from Britain, France, Germany, Japan, and the United States, Inflation and tax rates are as likely to be negatively as positively correlated, so the results cast doubt on the empirical relevance of simple models in which governments with time-invariant tastes choose monetary policy to equate the marginal deadweight burdens of inflation and taxes. James N. Poterba Julio Rotemberg Department of Economics Department of Applied Economics MIT, E52-350 MIT Sloan School, E52-432 Cambrige MA 02139 Cambridge, MA 02139 (617) 253-6673 (617) 253-8956 or its constraint either by printing money A government can satisfy budget inflation method of finance has efficiency costs.
    [Show full text]
  • WHEN AMERICAN SMALL BUSINESS HIT the JACKPOT: TAXES, POLITICS and the HISTORY of ORGANIZATIONAL CHOICE in the 1950S
    WHEN AMERICAN SMALL BUSINESS HIT THE JACKPOT: TAXES, POLITICS AND THE HISTORY OF ORGANIZATIONAL CHOICE IN THE 1950s Mirit Eyal-Cohen* When I came to study the income tax problems of the small business man, I had a feeling I had looked at all the ills and diseases of the tax law. —Charles T. Akre, Nebraska Tax Institute, 19431 INTRODUCTION While many political developments affected American small businesses during the twentieth century, the enactment of Subchapter S of the Internal Revenue Code (Code) was of particular significance.2 Under Subchapter S, a small business corporation could elect to be treated as a partnership and have its shareholders taxed at the end of each year on their tax return in a pass- through manner.3 The elimination of double taxation for the small business corporation resulted in immediate tax savings for this new hybrid entity.4 Although various integration proposals over the years have suggested exempting taxes on dividends,5 or creating a system to credit individuals for * S.J.D. Candidate, University of California, Los Angeles. I would like to thank Julie Makinen, Steven Bank, Allison Christians, Naomi Lamoreaux, Eric Zolt, and the participants of the 2008 McGill Tax Workshop for their insightful comments on drafts of this paper. I am especially grateful to my loving father Yossi Cohen, a second-generation small businessman, whose daily experience instigated me to study the history of small business. 1. Charles T. Akre, Federal Income Tax Problems of the Small Business Man, 22 NEB. L. REV. 252, 252 (1943). 2. “One of the most far-reaching and important changes in the Internal Revenue Code effected by this act was the addition of Subchapter S—Election of Certain Small Business Corporations as to Taxable Status.” Willard D.
    [Show full text]
  • Trade Restrictions and Incentives to Tax Pollution Emissions (Preliminary Notes)
    Trade Restrictions and Incentives to Tax Pollution Emissions (Preliminary notes) August 2010 Nori Tarui1, Morihiro Yomogida2, Ying Yao 1 Abstract This paper studies the effect of a trade restriction on an incentive for a trade partner to tax the emission of greenhouse gases. We are motivated by the recent debate on border tax adjustments in climate change policies, i.e., whether or not developed economies such as EU and US could use trade measures to encourage developing economies such as China and India to reduce the emission of greenhouse gases. We consider a partial equilibrium model with two countries, in which production emits greenhouse gases that generate a cross-border externality. With this model, we examine how an import tariff affects an incentive for an exporting country's government to choose a tax on the emission of greenhouse gases. We show that, in a case of noncooperative optimal policies, an import tariff would induce the exporting country to choose a lower emission tax as compared to a case in which a tariff is banned for the importing country. This result suggests that import restrictions could not encourage other countries to adopt more stringent regulation on the environment. 1Department of Economics, University of Hawaii. 2Department of Economics, Sophia University. - 1 - 1 Introduction Climate change and the discussion of mitigation policies in developing countries have renewed policymakers’ and researchers’ interests in the effects of border-tax adjustments (BTAs) on greenhouse gas (GHG) emissions and welfare among of trading countries. BTA, as discussed in US House and Senate bills, is proposed to encourage non-Annex-I countries such as China, India, and Brazil to adopt domestic GHG reduction policies, where GHG emissions are expected to increase as their economies grow into the future.
    [Show full text]
  • Group Disability Tax
    Group disability tax An overview and resource handbook for employers and their HR professionals MK-1984 (6-10) Contents: Unum: Your benefits partner 3 What tax rules apply? At Unum, we understand that employers design their benefit plans with diverse objectives and 4 Funding the disability plan goals in mind. The design choices they make can affect whether premiums and benefits are taxed, 5 Employer funded non-contributory and change the post-tax value of the benefits and gross up plans paid to their employees. 6 Combination funding To help you understand these tax implications, this handbook provides a general overview of the 8 Tax choice plans federal income tax rules that apply to disability plans. Various design options are outlined, along 9 Evaluating tax choice plans with helpful tools and checklists, so you can better align your benefit plan design with specific tax 10 LTD plan cost comparisons planning objectives. Whatever your objectives and goals, we will help 12 Selecting the right coverage design you meet them. 13 Summary: Group disability funding options 14 For more information 2 Group disability tax | unum.com Unum: Your benefits partner What tax rules apply? Federal personal income tax law can be summarized as three Disability insurance provides income basic rules: protection for individuals who cannot • Anything of value that an individual receives is income. work, or cannot work full time, due to • All income is taxable. injury or sickness. Unum provides a • Exceptions may apply. variety of disability products with a In this publication, we’ll focus on the exception that applies to taxing group broad range of coverage, cost and disability insurance premiums and benefits: premium funding options.
    [Show full text]
  • Tax Policy with Quasi-Geometric Discounting
    Tax Policy With Quasi-Geometric Discounting Per Krusell, Burhanettin Kuru¸s¸cu,and Anthony A. Smith, Jr.1 ABSTRACT We study the effects of taxation in a model with a representative agent with time-inconsistent preferences: discounting is quasi-geometric. Utility is derived from consumption and leisure, and taxation can be based on consumption and investment spending as well as on capital and labor income. The model allows for closed-form solutions, and welfare comparisons can be made across different taxation systems. Optimal taxation analysis in this model leads to time-inconsistency issues for the government, assuming that the government shares the consumer’s preferences and cannot commit to future taxes. We study time-consistent policy equilibria for different tax constitutions. A tax constitution specifies what tax instruments are available, and we assume that the government can commit to a tax constitution. The results show that a constitution leaving the government with no ability to tax results in strictly higher welfare than one where the government has full freedom to tax. Indeed, for some parameter values, the best tax constitution of all is laissez-faire (even though the government is benevolent and fully rational). For other parameter values, it may be optimal to allow the government to use a less than fully restricted set of tax bases. 1 Introduction Some recent literature emphasizes the possibility that individual consumers have time-inconsistent preferences.2 One aspect of time-inconsistency in preferences is that consumers want to commit their future consumption levels. To the extent that they cannot, but are still rational in trying to resolve their dilemma, an interesting question is whether there is a role for government intervention in markets.
    [Show full text]
  • Globalization, the X-Tax, and the Gatt
    Replacing the Income Tax with a Progressive Consumption Tax Daniel Shaviro American Enterprise Institute and New York University AEI WORKING PAPER #102, DECEMBER 5, 2003 www.aei.org/workingpapers www.aei.org/publication20881 #17197 REPLACING THE INCOME TAX WITH A PROGRESSIVE CONSUMPTION TAX Daniel N. Shaviro* Preliminary Draft All Rights Reserved I. INTRODUCTION The “depressing … gap between tax academic work and tax practice” that Edward Kleinbard recently noted1 can lead to missed opportunities on both sides. Tax academics, Kleinbard suggests, may sometimes deploy their analytical tools with too little information about how markets are actually operating.2 Practitioners, meanwhile, may fail to appreciate (or even learn of) important academic work if, from their standpoint, its style is overly abstract, couched in economics jargon, or mathematical. These features of current academic work are not meant (or at least not only meant) to be offputting. Abstraction may permit one to grasp fundamentals. Jargon, properly deployed, is simply a shorthand way of referring to ideas that the reader is assumed already to know, thus avoiding the need for tedious re-explication if this assumption is correct. Mathematics may serve to assure that one’s conclusions follow logically from one’s assumptions. Still, current academic style has costs as well as benefits when it impedes communicating important ideas to people who would be * Professor of Law, NYU Law School. 1 Edward D. Kleinbard, Taxing Convertible Debt: A Layman’s Perspective, 56 SMU L. Rev. 453, 453-54 (2003). 2 See id. at 469-470. I express no opinion on whether Kleinbard rightly directs this critique at Jeff Strnad, Taxing Convertible Debt, 56 SMU L.
    [Show full text]
  • Government Debt Financing—Its Effects in View of Tax Discounting
    Government Debt Financing — Its Effects in View of Tax Discounting NEIL A. STEVENS ‘ThE virtues of a balanced gove~ent budget have cussion has important implications for the pre- long been a subject of controversy among economists, sumed evils of debt issuance including reduced politicians, and the general public. Debate on this sub- investment and economic growth, debt burden on ject again has heated up in view of the persistence future generations, increased inflation, and greater of inflation and what some consider the inadequate growth of the government sector, as well as the growth of private investment and the excessive growth efficacy of fiscal policy actions. In addition, to the of government. Recently, a widespread movement has extent that movements in interest rates are related to developed to institutionalize the balanced budget changes in government borrowing, the issue of debt doctrine via a constitutional amendment,1 financing versus current taxation has important im- plications for the conduct of monetary policy due to The current debate provides an opportunity to the use of interest rate targeting by the Federal examine the issue of debt- versus tax-financed govern- Reserve. ment expenditures. The discussion centers on the dif- ferential economic effects of debt versus tax financ- ing of a given level of government expenditures.2 The Rise in Federal Debt In particular, this article will show that the difference The amount of government debt outstanding is between public debt financing and current taxes de- the total of past expenditures financed by the pends upon whether taxpayers correctly anticipate the issuance of government debt instead of current taxes, future taxes that debt issuance implies.
    [Show full text]
  • Taxing Multinationals in the Presence of Internal Capital Markets
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Koethenbuerger, Marko; Stimmelmayr, Michael Working Paper Taxing Multinationals in the Presence of Internal Capital Markets CESifo Working Paper, No. 4353 Provided in Cooperation with: Ifo Institute – Leibniz Institute for Economic Research at the University of Munich Suggested Citation: Koethenbuerger, Marko; Stimmelmayr, Michael (2013) : Taxing Multinationals in the Presence of Internal Capital Markets, CESifo Working Paper, No. 4353, Center for Economic Studies and ifo Institute (CESifo), Munich This Version is available at: http://hdl.handle.net/10419/79639 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Taxing Multinationals in the Presence of Internal Capital Markets Marko Koethenbuerger Michael Stimmelmayr CESIFO WORKING PAPER NO.
    [Show full text]
  • Organizing a Professional Practice: an After-Tax Choice-Of-Entity Calculus
    Electronic copy available at: http://ssrn.com/abstract=1361915 PARTNERSHIPS , S CORPORATIONS, & LLCs EDITED BY SAMUE L P STARR, CPA, LL . M. ORGANIZING A PROFESSIONAL PRACTICE: AN AFTER-TAX CHOICE-OF-ENTITY CALCULUS BY THOMAS E. RUTLEDGE, MARKS. FRANKLIN, AND STEPHEN M. LUKINOVICH A crucial decision made in any sional practices, we consider, on a pro for­ The tax tail should by no means wag the business venture is the choice ma basis, the after-tax benefit realized by choice-of-entity dog, but practitioners agree of entity, a complex calculus the professional owner of the venture un­ that weighs and balances competing in­ der various classification scenarios. While that the overall tax liability projected to terests and objectives against the "stan­ this analysis is of necessity limited to its result from any particular form chosen for a dard models" that are available under assumed facts, we conclude that assuming the various business organization professional practice is a serious considera­ such is otherwise defendable. It is from statutes. The standard model ultimately the tax perspective most efficient to use tion. The key to any comparison wi ll be the selected is then customized to the ven­ an S corporation in which 25% of earn­ assumptions made, including those re lating ture by private agreement. Or at least ings are distributed as salary with the bal­ that is what should happen. ance distributed in the form of dividends. to the client's income and the stabi lity of the In most organizations, the client, the The next most efficient approach is to or­ practice.
    [Show full text]
  • Fostering Ethical Professional Identity in Tax: Using the Traditional Tax Classroom Heather M
    University of California, Hastings College of the Law UC Hastings Scholarship Repository Faculty Scholarship 2017 Fostering Ethical Professional Identity in Tax: Using the Traditional Tax Classroom Heather M. Field [email protected] Follow this and additional works at: https://repository.uchastings.edu/faculty_scholarship Recommended Citation Heather M. Field, Fostering Ethical Professional Identity in Tax: Using the Traditional Tax Classroom, 8 Colum. J. Tax L. 215 (2017). Available at: https://repository.uchastings.edu/faculty_scholarship/1639 This Article is brought to you for free and open access by UC Hastings Scholarship Repository. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of UC Hastings Scholarship Repository. For more information, please contact [email protected]. FOSTERING ETHICAL PROFESSIONAL IDENTITY IN TAX: USING THE TRADITIONAL TAX CLASSROOM Heather M. Field* Abstract * Professor of Law & Eucalyptus Foundation Chair, University of California Hastings College of the Law. I appreciate the opportunity to present this project at the University of Washington Symposium on Protecting Taxpayer Rights, at the American Tax Association Teaching & Curriculum Conference, and at a UC Hastings Teaching Roundtable. I thank the event participants and Kate Block Scott Fruehwald, Daniel Lathrope, Manoj Viswanathan, and Alina Ball for their feedback. COL UMBIA JOURNAL OF TAX LAW [Vol.8:215[ Will a tax lawyer in private practice help taxpayers comply or help taxpayers cheat? Will a government tax lawyer respect or abuse taxpayer rights? Answers to these questions turn, at least in large part, on the lawyer's ethical professional identity-the lawyer's philosophy of lawyering, which reflects her values, her sense of responsibility to others, and her self-concept of who she is (and wants to be) as a member of the legal profession.
    [Show full text]