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To: Whom it may concern Tax File Memorandum From: Ailing Shang CPA Firm

Re: Finch Construction Company Tax Planning Memo

Relevant Facts

Finch Construction Company provides the carpenters it employees with all of the required tools. However, the company believes that this practice has led to some employees not taking care of the tools and to the mysterious disappearance of some tools. The company is considering requiring all of its employees to provide their own tools. Each employees salary would be increased by $1,500 to compensate for the additional cost.

Issues

After managements investigation and decision on disappearance of company tools and other equipment issues. Finch management is going to require employees to purchase carpentering tools to perform their duty. By resolving this issue, Finchs management will increase its employees salary by $1,500 to compensate for the additional cost. This action will affect employees financial report when tax return is required to file.

Analysis

As tax adviser, we have spend countless hours trying to develop techniques to achieve tax-exempt status for income. However, employee benefits planning are greatly influenced by the availability of certain types of exclusion. After extensive research, we have found the following tax-exempt can be applied to your salary increase decision for your employee. By Internal Revenue Services definition on Fringe Benefit, a fringe benefit is a form of pay for the performance of services. Any fringe benefit you provide to your employee is taxable and much be included in the recipients play unless the law specifically excludes it. According to Internal Revenue Services Publication 15-B Section 2 Working Condition Benefits states that this exclusion applies to property and services you provided to an employee so that the employee can perform his or her job. It applies to the extent the employee could deduct the cost of the property or services as a business expense or depreciation expense if he or she had paid for it. This exclusion also applies to a cash payment you provide for an employees expenses for a specific or prearranged business activity for which a deduction is otherwise allowable to the employee. Based on the rules listed above, the increases of employees salary are excluded from gross income. However, as an employer, you must require the employee to verify that the payment is actually used for those expenses and to return any unused part of the payment. For this gross income exclusion, treat the following individuals as employees: A current employee. A partner who performs services for a partnership.

A director of your company. An independent contractor who performs services for you.

Conclusion

By applying the exclusion rules are listed by Internal Revenue Service, the increases of employees salary are excluded from gross income; there will have no impact on employees tax return. However, as an employer, Finch Construction Company must require the employee to verify that the payment is actually used for those expenses and to return any unused part of the payment. For further calculation, we will require Finch Construction Company to provide employees salary forms to determine employees after tax and after-tax-exempt income.

Actions

Meet with the client to determine the final position on the tax return filing. And our firm should request further employees salary information.

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended, or written to be used, and cannot be used for the purpose of avoiding tax-related penalties under the Internal Revenue Code.

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