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In this publication, the IRS lists a number of fringe benefits that you can provide employees and details when/why they would be considered taxable vs. non-taxable. However, at the start of the document (and in virtually every subsection) it notes that these rules do not apply for partners or 2%+ shareholders.

So what are the taxation implications of adding fringe benefits for shareholders in a startup established as an S Corp?

While it is certainly not always the case, for my company (and the purposes of this question), there are no silent partners. All shareholders are working full-time at the company. Also, if it makes a big difference, all employees are shareholders.

I'm thinking things like:

  • Insurance premiums: basic health coverage
  • Insurance premiums: life, dental, optical, etc.
  • Onsite meals
  • Vehicles / gas / toll passes
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The word partners is a loaded word. I'm assuming you mean owner, is that correct? Also, how is the business structured? C Corp, LLC, partnership, etc? Tax rules vary based on the type of entity. – Zuly Gonzalez♦ May 2 '12 at 16:54
I'll edit to clarify. The business is set up as an S Corp. – Jeffrey Blake May 2 '12 at 16:58

3 Answers

up vote 1 down vote accepted

Everything applies in the publication unless you are a 2% or greater owner in a S-corporation or highly compensated employee. The rules are designed for employees, not employee-owners, such as large shareholders in a S Corporation or Officers.

As for 2%> shareholders, the publication itself says: "Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder."

You will find what you are looking for in IRS documentation concerning treatment of fringe benefits for partners in a partnership.

Some further info: http://www.fusiontaxes.com/atlanta-tax-planning-30306/tax-consequences-of-fringe-benefits/

http://realestate.cpa.pro/partner_fringe_benefits.htm

UPDATE: The publication 15-B you cited above should contain all the information in summarized format. If you search for "S Corporation" and for "partnership" you should find all the relevant exemptions/applications. Is there a specific fringe benefit you are concerned about that's not covered in the publication?

Also see: http://www.surkinlaw.com/Getting%20money%20out%20of%20an%20S%20corporation.pdf

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Right...That's exactly what I said in the first paragraph of the question. So what are the rules for 2% or greater shareholders? – Jeffrey Blake May 3 '12 at 18:13
sorry, the rest of my post got cut off, I've added it back to the post above. – Henry the Hengineer May 3 '12 at 18:55
+1 for your last link, as that breaks things down pretty well. If you can also provide a link to the IRS docs for treatment of fringe benefits for partners in a partnership, I will also accept this answer as best. – Jeffrey Blake May 4 '12 at 14:24
The citations provided by the cpa.pro link can be searched for on taxalmanac (which is a great resource for tax questions btw) or in the irs code itself. I'll update the original post with more resources. – Henry the Hengineer May 4 '12 at 16:50
up vote 0 down vote

We have an accountant who handles this for us by my understanding is:

  • Insurance premiums: If you are self employed or an LLC then you can expense your insurance premiums which would reduce your total taxable income. For an S Corp I think the company would pay for it for the employee and it would be a company expense, decreasing your taxable income.
  • Onsite meals you would probably put on a company credit card and put it as a company expense if it's for employees. If it's for you and a partner, or with a client it probably should be 'meals/entertainment' which is only 1/2 deductible.
  • Vehicles / gas is best done with mileage reimbursement. I think 2012 is 55.5 cents a mile. This would be paid to the employee and would be an expense to the company (lowering your taxable income)

In an S Corp you are treated more like an employee then in something like an LLC. In general the things you mentioned would be expenses to the company, lowering the companies overall taxable income but I recommend setting up a relationship with an accountant.

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up vote 0 down vote

I'm not sure if there is a way to accomplish what you are trying to do, but two other considerations come to mind first. You don't say if there are any employees. The IRS may want to know who's active in the business, or if this is just a scheme to avoid employment taxes for shareholders who are actively working in the business. And I think there is a question on the tax forms to indicate if a shareholder is Active in the business. Next, be aware that ALL profits are distributed to shareholders every year - whether or not there is cash to distribute. That can mean that shareholders must pay their own income tax on money they never received. (They will get that money eventually - hopefully).

My guess would be that these are called "Employee benefits" because they are for employees. They may be fully taxable to shareholders. But there may be a way to work around this, perhaps with a minimal payment to the shareholder.

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You're right - there is a big difference between shareholders who are not active in the company and those who are. We are a 4-person shop. All employees are shareholders and all shareholders are employees (working full-time for the business). – Jeffrey Blake May 3 '12 at 13:59

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