Making the Most of Fringe Benefits for Business Owners

A fat paycheck isn’t the only way to take money out of your company and it’s not always the most sensible tax-wise. Fringe benefits often accomplish more in the way of tax savings. Review these possibilities with your tax adviser:

For Company Owners

Loophole: Have your company buy a hefty group term life insurance policy on your life. The premiums will be fully deductible by the company as long as the plan coverage does not discriminate against lower-income employees. Through a quirk in the tax law, this strategy creates tax savings for you.

How it works: Say your company pays the premium on a $1 million insurance policy on your life. The “taxable cost” of the premium must be included in your taxable income.

Depending on your age, this taxable cost, which is figured according to an IRS table (in Publication 15-B, Employer’s Tax Guide to Fringe Benefits), could be substantially less than what the policy would cost you if you bought it yourself.

Benefit to you: You get $1 million of life insurance for a small amount of extra tax.

Loophole: Have your company pay for your medical insurance. Premiums for the insurance are deductible by your company and are not considered income to an owner/employee.

• Company car. The value is tax free to the extent the car is used for business. The cost of the portion not applicable to business use is taxable as compensation.
  Note: Using the car for commuting is not a deductible use.
• Adoption assistance. Employees having modified adjusted gross income of no more than $151,940 can receive up to $10,160 tax free for 2003 under an adoption assistance plan that meets the requirements of Section 137 of the Tax Code. The cost is deductible by the company. While the benefit is not subject to income tax withholding, it is still subject to FICA and FUTA taxes.
• Nontraditional benefits. In recent years, more companies have started offering benefits that have a minimal direct cost but that are highly valued by employees. These benefits may actually save the employer money by increasing morale and reducing absenteeism and turnover. The benefits also improve your ability to recruit new employees. Examples:
• Flextime—working a full schedule with hours and days selected by employees on an individual basis.
• Telecommuting—working entirely or partially from home.
• Job sharing—two employees sharing one full-time position.