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.

by Mark E. Battersby [January 16, 2001]

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.

— End

     

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	[Dec. 28, 2000]	Self Rental, a Tax Strategy
	[Nov. 15, 2000]	Tax-Saving Tax Strategies for ISPs