Tax Pros FAQ's
1. Is this program merely a method for
avoiding employment
taxes?
Definitely
not. Toolchex clients follow the industry
practice of requiring certain employees to provide their own tools as a
condition of employment, based on time-tested benefits that justify
such a
policy. Clients benefit:
The amount of the reimbursement for tools
was not being identified as such—by category and specific rate—but was
acknowledged by the client and its employees to be generally
proportionate to
the employees’ investment in tools. It
was fundamentally unfair for employees to be paying taxes on expenses
incurred
for the benefit of their employer, and for the employer to be paying
employment
taxes on such expenses.
Toolchex clients
reimburse employee business expenses pursuant to a working condition
fringe
benefit under Treasury Regulation
§1.132-5(a)(1)(v) and an accountable plan under Treasury Regulation
§1.62-2(c)(1).
3. What is the legal authority for pre-tax treatment of the
Toolchex benefit?
I.R.C. §132 excludes
from gross income any fringe benefit that qualifies as a working
condition
fringe benefit, defining that term in §132(d) as any property or
services provided
to an employee which, if the employee paid for such property or
services, such payment would be allowable
as a deduction
under §162 or §167. Section 162 provides
a deduction for all ordinary and
necessary business expenses, and §167 provides a deduction for
depreciation
expenses. Treasury Regulation
§1.62-2(c)(4) provides that amounts an employer pays to an employee for
employee business expenses under an accountable plan are excluded from
the
employee’s gross income, are not required to be reported on the
employee’s Form
W-2, and are exempt from the withholding and payment of employment
taxes. Treasury Regulation §§31.3121(a)-3,
31.3306(b)-2, and 31.3401(a)-4 of the Employment Tax Regulations, and
Treasury
Regulations §1.6041-3(h)(1) of the Income Tax Regulations.
Under §1.62-2(c)(1)
of the regulations, a reimbursement or other expense allowance
arrangement
satisfies the requirements of I.R.C. §62(c) if it meets “the three
requirements” set forth in paragraphs (d), (e), and (f) of Treasury
Regulation
§1.62-2: business connection, substantiation, and returning amounts in
excess
of expenses.
An arrangement
meets the business connection requirement if it provides reimbursements
for business
expenses that are allowable as deductions under sections 162 through
198 of the
Internal Revenue Code, and that are paid or incurred by the employee in connection with
the performance of
services as an employee. Current year
expenses allowable under those sections are obviously reimbursable. For tools purchased in previous
years—depreciation expense is deductible under §167 of the Code and all
tools
required for employment maybe eligible as start-up costs for the
employee’s job
under §195 of the code.
In most cases,
once the Proof of Purchase has been established and verified by
Toolchex, the
expense will be tracked and reimbursed based on cost and date of
purchase. Under the Toolchex program all
tools fall
under 1 of 3 categories.
Category
1-All individual tools purchased during the current year, with a
nominal
purchase price, will be fully reimbursed during the current year.
Category
2-All individual tools purchased during the current year, deemed
necessary to
be depreciated over time, will be reimbursed through a 7 year MACRS
Depreciation Schedule.
Category
3-All individual tools purchased during a previous year, regardless of
price,
through a 7 year MACRS Depreciation Schedule.
7. So, how does Toolchex determine the
benefit period and
reimbursement rate?
The Toolchex
benefit is not an allowance rate or rental rate. It is a gradual
reimbursement
of actual, finite expenses. Toolchex
calculates a reasonable reimbursement period and rate that furthers the
industry philosophy of encouraging employees to consistently invest in
their
careers. The rate will vary between $1-8
per hour, based on the employer elected reimbursement percentage and
the
employees overall compensation rate.
All submitted
expenses that meet the Business Connection must be accompanied by a
proof of
purchase that includes date of purchase, a description of the purchase
and the
price of the purchase. Examples of Proof
of Purchase can include a sales receipt, bill of sale, vendor (tool
dealer)
print out, and banking statements.
No.
In large measure, the employee is being
reimbursed for the wear and tear on his tools (depreciation incurred)
on behalf
of the employer’s business. Furthermore,
the economic reality, and part of why the IRS recognizes the unique
nature of
such employee expenses, is that they must have their own tools before
they get
hired. If ownership of their tools were
transferred to the employer, it would be impossible to be hired again
following
termination.
Maybe. Toolchex’s
understanding as an underlying
premise of the plan is that an employee is typically being paid a
greater wage
to offset his tool expenses. He is being
paid for his time and labor, with an additional “bump” for tools and
equipment. This bump is typically
increased for employees that have the greater tool inventory. The bump in pay
is not tied to the nature of the
service, which would be categorized as compensation for time and
labor—and
fully taxable. Rather, it is tied to the nature and cost of the
underlying
tools for which the employee business expense is incurred—and is not
considered
income pursuant to IRC §62(c), if reimbursed through an accountable
plan. Before the Toolchex Accountable Plan
is
adopted by a client company, this wage bump is considered a
reimbursement under
a non-accountable plan. The employee is
then limited to claiming his employee business expenses as a
miscellaneous
itemized deduction under the unreimbursed expense approach. Treasury Regulation §31.3121(a)-3(a) states:
“if both wages and the reimbursement or other expense allowance are
combined in
a single payment, the reimbursement or other expense allowance must be
identified either by making a separate payment or by specifically
identifying
the amount of the reimbursement or other expense
allowance.
Roughly since
adoption of the Tax Reform Act of 1986 and the Family Support Act of
1988. There are several programs offered in
different regions of the country. Toolchex
is the largest program of its kind in the
