Question

Dewin Auer Best (DAB) CPAs has an audit and tax client named Meyers, Inc. Meyers is a closely held C corporation whose majority shareholder, Alicia Meyers, is also its CEO. Alicia also is a tax client of DAB. During the latest year, Meyers, Inc. allowed Alicia to use a company credit card to make numerous personal purchases, but she did not reimburse the company for any of these expenditures. She also has a company car that she uses for all her transportation needs, business and personal. You are a first-year professional and have been asked by your partner, Sarah Best, to prepare Form 1120 for Meyers, Inc. and Form 1040 for Alicia Meyers. When you start to prepare the Form 1120, you notice that Meyers, Inc. has reported these charges and the total amount of operating costs for the automobile as deductible items. When reviewing Alicia’s personal tax information, you note that on her W-2, box 1, the amount listed as salary is exactly the contracted amount reported in the board of directors minutes and does not include any additional amounts for the unreimbursed expenses or automobile usage. In addition, box 14 is blank and does not contain any reported fringe benefits. Consult Circular 230, the SSTSs, and the AICPA Code of Professional Conduct. What issues must be resolved before you can recommend that Sarah Best should sign this tax return? Ignore the standards that a return preparer must satisfy under the Internal Revenue Code.

Answer 1

Travel, meals, and entertainment. Subject to limitations and restrictions are allowed, a cooperative can deduct ordinary and necessary travel, meals, and non-entertainment expenses paid or incurred in its trade or business. Generally, entertainment expenses, membership dues, and facilities used in connection with these activities cannot be deducted. Generally, no deduction is allowed for qualified transportation fringe benefits. Also, special rules apply to deductions for gifts and convention expenses.

Travel. The cooperative cannot deduct travel expenses of any individual accompanying a cooperative officer or employee, including a spouse or dependent of the officer or employee, unless:

• That individual is an employee of the cooperative, and

• His or her travel is for a bona fide business purpose and would otherwise be deductible by that individual.

Meals: Generally, the cooperative can deduct only 50% of the amount otherwise allowable for non-entertainment related meal expenses paid or incurred in its trade or business. Meals not separately stated from entertainment are generally not deductible. In addition (subject to exceptions under section 274(k)(2)):

• Meals must not be lavish or extravagant, and

• An employee of the cooperative must be present at the meal

A fringe benefit is a form of pay for the performance of services. An example of a fringe benefit is when an employee is allowed to use a business vehicle to commute to and from work.

A common question is: Are fringe benefits taxable? In general, any fringe benefit that is provided is taxable and must be included in the employee’s pay unless the law specifically excludes it.

Taxable means that the fringe benefit is included in the employee’s wages and reported on Form W-2. Federal income tax, social security tax and Medicare tax are withheld from the value of the benefit unless the employee has already reached the calendar year’s maximum social security limits

Conclusion :
Any Fringe benefit provided to employee must be included in his salary in Form W-2, as it is taxable.

Any Expenditure which is not incurred for business is not deductable. Hence Personal expenses of employee incurred by company, which is not reimbursed is not deducted while calculating income.