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Ownership has its privileges, make sure you are taking your fair
share of perks and perquisites. But don't overdo it?when it comes to fringe
benefits, greed is not good.
Paying the fixed overhead costs of an ISP business is all that some
operators, particularly those just starting out, could ever hope for. However,
as your ISP business grows?and prospers?the subject of employee benefits is sure
to arise.
If your ISP business is going to reward employees, why deny yourself the
benefits you are offering those employees?the same benefits that you would
expect if you were an employee?
Defraying double-dipping
As the owner or
shareholder in an ISP business that is profitable, you'll want to avoid the
double tax that applies when the business pays you dividends. The business pays
those dividends from income on which it has already paid the tax (there is no
deduction for dividends paid) and the recipient pays tax when that dividend is
added to his or her tax bill.
While trying to avoid the double tax on dividends, many ISP owners often run
afoul of the accumulated earnings tax. That penalty tax is levied when profits
are left in an incorporated business in amounts that exceed the reasonable needs
of that operation.
Rather than pay the double tax on dividends or risk leaving too much money in
the business, many ISP operators attempt to take the profits from their business
in the form of compensation.
Remember, regardless of the amount, the sum you pay yourself may be viewed as
excessive by the IRS?especially if your business pays no dividends to you
or the other shareholders.
Paying yourself "excessive compensation" regardless of the amounts involved,
means that an IRS examiner may recharacterize it as dividends paid and, once
again, expose you and your ISP to that dreaded double tax.
Border boons
While every ISP operation must
generally treat fringe benefits as a part of employees' taxable wages, there are
certain fringe benefits that are exempted from this rule. In fact, the major
advantage to offering many fringe benefits is that the your ISP operation can
claim a business deduction for the cost even though employees?or you?aren't
required to pay tax on them.
An example of one nontaxable fringe benefit is a company car. The cost of
owning or renting the vehicle along with its upkeep, gas, oil, insurance, and
the like is a legitimate income tax deduction for most ISPs. An employee?or the
operation's owner?who uses the company car for business purposes doesn't realize
taxable income.
Under our tax rules, many other fringe benefits can also be ignored for tax
purposes. Benefits such as air fare, cars, computers, educational benefits,
entertainment, seminars, or travel are often excluded from the recipient's
income as working condition fringe benefits?even when the recipient is the ISP
operation's owner. Of course, some of those benefits may constitute income, at
least to the extent that they are used for personal purposes.
One personal benefit that many employers provide employees?and themselves?is
insurance. The ISP operation's employees?or owner?is required to include the
cost (or what the IRS says the cost should be) of more than $50,000 of group
term life insurance provided by the ISP business. That means the premiums for up
to $50,000 in life insurance are tax-free to the business's owner and employees.
The premiums can also be deducted by the ISP business.
Fair play caveat
Any ISP that offers employees
or the owner an employee welfare benefit plan?like health insurance or a
retirement program?must be fair. It is illegal to discriminate in favor of the
operation's owners, its key employees, or any group of employees. In fact, the
Employee Retirement Income Security Act (ERISA) is a federal law that affects
the administrative aspects of employee benefit and retirement plans.
Legitimate tax deductible expenses permitted for travel, meals, entertaining,
automobile expenses, and the like, if properly claimed and documented, can give
any ISP business owner many advantages not enjoyed by regular employees.
Unfortunately, many business owners are often tempted to go too far?and that's
where trouble arises.
There will be big problems for the the ISP operator who fails to
differentiate between personal and business income and plunders the company's
assets at will.
Even though it is your business, it's also your business's
money and you may not spend it on yourself, willy-nilly as you choose. You have
worked hard to build your ISP business, but that does not mean it's time to reap
the rewards and abuse your position.
Be smart and be fair?the IRS is looking for any ISP operator who abuses
tax-advantaged fringe benefits with reckless abandon. Take only your fair share
of legitimate, non-taxed benefits, and report the correct amounts on your
taxable benefits.
Fringe benefits may be a valuable business edge for you on a private level,
but that's no reason to abuse personal benefits and take your ISP business to
the brink of a taxing disaster.
Securing a Small Business Loan by Mark E. Battersby
5 Stupid Things ISPs Do to Screw Up Their AUPs by Rachel Luxemburg
Management 101: Creating Structures by Jason Zigmont
Protect Your ISP With A Strong AUP by Christopher Knight
Self-Rental, a Tax Strategy by Mark E. Battersby
Tax-Saving Tax Strategies by Mark E. Battersby
Extremely Affordable Worker Magnets by Mark E. Battersby
Reward Yourself With Fringe Benefits by Mark E. Battersby
Turn Your ISPs Business Losses into Tax Benefits by Mark E. Battersby
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