Just because taxpayers claim an expenditure is tax-deductible doesn't mean that a paid tax return preparer should refrain from asking for a few details. A tax practitioner should question all unusual business deductions by the self-employed. These individuals are more likely than most to receive IRS scrutiny. Therefore, a valuable part of any tax preparer job is avoiding deduction of expenses that are indefensible upon audit by the IRS.
Business owners are known to use creative ways for employing family members and then deducting fringe benefits for these workers. For example, a proprietor can employ a spouse who is not an owner of the business. Like any employee, the spouse may receive fringe benefits that are business tax deductions. The key tax preparation questions surrounding these situations relate to whether the spouse is a bona fide employee.
Accountant
One of the increasingly common actions by business owners is employing a spouse and then providing company-paid health insurance. Coverage is provided for the employee plus the worker's family members - which obviously includes the spouse who owns the business. This makes family health insurance coverage a tax-deductible business expense that lowers self-employment income.
Coverage of this topic in tax preparer courses confirms that the expense is deductible if the health insurance plan is provided by the business to all eligible employees. Therefore, the plan cannot discriminate in favor of only the employed spouse over any other workers. The health insurance policy must be held in the name of the employee-spouse instead of stating the business proprietor as the policy owner.
Frequently, the spouse is the only employee of the business. The health insurance benefit is often accompanied by a medical reimbursement plan under Section 105 of the Internal Revenue Code. Consequently, all out-of-pocket healthcare costs for the family become tax-deductible business expenses. In such a case, tax preparer duties include confirming that a spouse is a legitimate employee who received a W-2 from the business.
In addition, evidence is required to confirm that accountable plan rules were followed for the medical reimbursements. The guidelines covered in IRS tax preparer study state that reimbursement to a worker is not an addition to W-2 income when documentation of the reimbursable expense is presented to the employer.
The IRS has unsuccessfully attacked spousal employment arrangements in court. Based upon the rulings, paying close attention to details is imperative for business owners. Among the critical information for a business to retain is documentary evidence of hours worked by an employee spouse and the nature or extent of the work. Actual paychecks having accurate withholding based upon Form W-4 are essential to establishing a bona fide employment arrangement. An employee spouse should receive a paycheck and deposit it to a separate bank account from the couple's joint account.
Both case law and the IRS position on reimbursement plans for spousal employees indicate that performance of nominal or insignificant services that lack economic substance does not comprise an employment relationship.
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.
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