“Tool
Plans”: IRS Scrutinizing Employee Reimbursement
See below:
LIFO Valuation of New Vehicles After Rev. Proc.
2008-23
In certain circumstances,
the tax laws permit an employee to deduct amounts received from an employer in
reimbursement of business-related expenses incurred by the employee. In addition
to income tax savings for the employee, because the amount reimbursed is not
reported as wages or other compensation, that amount is also exempt from
employment taxes.
In recent years, plans
designed to take advantage of these tax benefits, commonly known as “tool
plans,” have been aggressively marketed in the automobile industry. In response
to growing concerns that employers may be mischaracterizing wages as
reimbursements solely for tax purposes, the Internal Revenue Service has
organized a team to investigate and combat improper tool plans.
Given this heightened
scrutiny, dealerships should review their tool plans to determine whether they
comply with the tax laws. An employer’s use of an improper tool plan could
expose the employer to liability for unpaid employment taxes as well as interest
and penalties.
To pass muster, a tool
plan must meet four requirements.
-
The reimbursement
must be for an expense incurred in connection with services performed for
the employer.
-
The expense must be
substantiated by the employee in writing with sufficient detail to permit
the employer to determine the business purpose for the expense.
-
The employee must
inform the employer of the expense within a reasonable period of time,
typically within 60 days of the date the expense is incurred.
-
If the amount of the
reimbursement exceeds the expense incurred, the employee must return such
excess amount to the employer within 120 days.
LIFO Valuation of New
Vehicles After Rev. Proc. 2008-23
Prior to the issuance of
Rev. Proc. 2008-23 on March 24, 2008, the IRS required auto dealers using the
"last-in first-out" (LIFO) accounting method to maintain two separate pools for
new automobiles and for new light-duty trucks. If the dealership also applied
LIFO for used vehicle inventories, there was a similar two pool requirement. The
IRS had issued guidelines for pooling used vehicles for LIFO but had not done so
for new vehicles. Dealers were using the used vehicle guidelines for pooling new
vehicles, but doing so created uncertainty in the classification of the pools as
well as audit exposure.
In Rev. Proc. 2008-23,
the IRS has allowed dealerships to:
-
combine its two new
vehicle pools into a single new vehicle LIFO pool, and
-
combine its two used
vehicle pools into a single used vehicle LIFO pool.
No LIFO pool may include
vehicles with a GVW exceeding 14,000 pounds. This is known as the Vehicle Pool
Method. It will eliminate the uncertainty of classifying vehicles between two
different pools within used vehicles and new vehicles.
The Vehicle Pool Method
is permitted beginning in calendar year 2007. Change to the Vehicle Pool Method
can be made automatically with no advance IRS permission for 2007 federal income
tax returns. If 2007 income tax returns have been filed, change to the Vehicle
Pool Method can not be made until 2008.
To ensure IRS compliance, any tax advice included in this memorandum may not be
used by any recipient to avoid penalties imposed under the Internal Revenue
Code, state or local tax law provisions.
These materials
are designed to provide general information prepared by professionals in regard
to the subject matter covered. It is provided with the understanding that the
author is not engaged in rendering legal, accounting, or other professional
service. Although prepared by professionals, these materials should not be
utilized as a substitute for professional service in specific situations. If
legal advice or other expert assistance is required, the service of a
professional should be sought. |
