HEALTH INSURANCE PITFALL
Continue Reading Below
Small business owners who gave employees stipends or subsidies last year to help them buy health insurance may get an unpleasant surprise this tax filing season.
If owners think the money was tax-free, they're mistaken.
"Any time employees receive cash, it's a taxable event," says Steven Friedman, an attorney with Littler Mendelson, a New York-based firm that specializes in employment law.
The problem is owners may not realize that the money is subject to employment taxes. Those are paycheck deductions for Social Security and Medicare that workers pay; their employers must pay the government an equal amount. Workers also have to pay income taxes on any extra money they received.
Some bosses have hoped that calling the money a health care stipend would exempt it from employment taxes. But the only way money for health insurance is tax-free is if employees receive it under what are called qualified health benefits plans. Those include health insurance plans that cover employees.
Continue Reading Below
A growing number of small businesses stopped offering insurance to workers in 2014, according to health insurance brokers. And insurer Wellpoint (now called Anthem) lost 300,000 customers who had coverage through small business group plans, or about 16 percent of its total small business customers, through the first nine months of the year. It's not known how many of those people stopped getting insurance from their employers, or how many received money toward the purchase of individual coverage.
The money for individual purchases must be included on employees' W-2 forms. If employers have already distributed those forms, they'll need to be updated and given to staffers again. It's a good idea to give staffers a heads-up that they'll be getting a second form so they don't file early and then have to amend their 1040 returns.
Employers will also have to report the extra compensation to the IRS and state and local tax authorities, and pay the employment taxes on that money.
REPAIR OR IMPROVEMENT?
The IRS spent several years writing regulations that spell out when a business is allowed to deduct up-front the costs of changes to equipment and property, and when those expenses must be depreciated, or deducted in installments over a period of years. The agency issued final regulations in October, and businesses must follow them starting with the 2014 returns they're filing this year.
The regulations differentiate between repairs and improvements to property including machinery and real estate. Repair costs can be fully deducted up front, while improvements must be depreciated.
IRS Publication 535, Business Expenses, gives some general examples. If a business maintains a private road, it's a deductible repair. If a gravel road is replaced by a concrete one, it must be depreciated. If you repair a vehicle, you can deduct what you spend. But if the vehicle is overhauled and reconditioned, the cost must be depreciated.
You can find Publication 535 at http://1.usa.gov/1CL35FM . If you have any questions about whether work you've had done is a repair or an improvement, it's best to consult an accountant or other tax professional.
Follow Joyce Rosenberg at www.twitter.com/JoyceMRosenberg