Advice of Enrolled Agents Keeps Business Owners Out of IRS Trouble

July 26, 2011 by  Filed under: Taxes 

IRS enrolled agents are not only tax preparers but also important advisers. This is particularly true for business owners, who are common recipients of information from tax professionals. An important example occurs when a business owner with a corporation starts learning about establishing benefit plans from someone with an enrolled agent certificate.

Many incorporated businesses have the shareholders as the only employees. The corporate structure exists to create employee benefit plans that, of course, aid only the business owners representing the entire workforce. Benefit plans are not created by enrolled agents but these professionals can certainly describe the tax consequences.

There are more types of tax-preference benefit plans available for corporations than other business structures. That is because a corporation is a separate legal entity. Therefore, many professionals with enrolled agent careers establish relationships right away with new corporations.

One type of benefit plan often created by closely held corporations is purchase of disability insurance for the employees by the business. Employer provided disability insurance is usually excluded from counting as worker compensation. This permits the shareholders who work for the corporation to obtain disability insurance as a tax-deductible expense.

There are many benefit plan arrangements for employees that are not added to wages. These are addressed in enrolled agent exam preparation. One example is health insurance premiums paid by an employer. But, unlike the amounts paid from health plans for employee claims, any disability benefits collected by an employee are taxable income. An exception is payment related to a loss of bodily function instead of an employee’s inability to earn income.

An enrolled agent job of explaining tax consequences about benefit plans to business owners should include the revelation that most disability claims are taxable unless they are related to a particular type of employee injury. There are also a few IRS requirements for a corporation deducting disability insurance premiums. Firstly, there must be a formal company established plan. Secondly, the plan must be established for the benefit of all employees.

This means that a plan cannot just benefit shareholders. Even when shareholders are also employees, any other employees must be included in the plan. Otherwise, the IRS will disallow both the tax deduction of the premium payments and their exclusion from employee compensation. In addition, deductible benefit plan payments for shareholder/employees are only available for regular C corporations. Business owners who work for their own S corporations have different rules. An S corporation generally cannot deduct the cost of benefits to more than 2 percent shareholders, regardless of their additional status as employees.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Fast Forward Academy is a leading publisher of education for enrolled agent certificate and tax professionals. Access to free questions for the enrolled agents is available on their website.

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