The recent indictment of Allen Weisselberg, CFO of the Trump Organization, has shed light on a common, albeit potentially serious, practice among business owners: the deduction of personal expenses of employees through a closely held company. In this specific case, Weisselberg and the Trump Organization are accused of deducting personal expenses of Weisselberg while not including the amounts as taxable compensation to him. While the nature of these expenditures is common, the rules on the deductibility of these expenditures can be complex.
Within the restaurant industry, many benefits may be provided to employees or owners of the company which could be considered personal in nature. These may include: use of a company automobile, comped meals while working, cell phone usage, gift cards for exceptional performance, or tickets to a sports game as a reward for exceptional performance. Though all of these can be relatively low in value, the deductibility or taxation to the recipient of all these items differs by falling into different distinct buckets:
- De-Minimus Fringe Benefits: These benefits are almost always deductible by the company and not included as taxable compensation to the recipient. De-minimus fringe benefits are not defined by the IRS but stated to be items so low in value that it would make accounting for them impractical. Examples of these types of benefits would include the use of an employer-provided cell phone primarily for business use, snacks or drinks offered while working, or occasional tickets for entertainment events. Employers are encouraged to track these types of expenditures as de-minimus employee fringe benefits in the case of an IRS audit to uphold the position of being a deductible expense.
- Employee Shift Meals: These meals are 100% deductible by the employer and not included as compensation to the employee. A note should be made that the deduction is equal only to the cost of the goods used to prepare the meal and not a deduction equal to the sales price of the meal. To support the deduction, it is advisable that the meals are easily identifiable through separate general ledger accounts and/or codes within the POS system.
- Taxable Fringe Benefits: Certain fringe benefits can be deduced by the employer only if they are included as compensation to the employee. Two of the most common examples would include cash equivalent gifts (i.e. cash or gift cards) to the employee or use of a company car which is also available for personal use. In these examples, cash or cash equivalents are never de-minimus in nature. Personal use of an automobile must be accounted for under one of the various methods with imputed income reported to the employee on their W-2 at year-end. Strict records should be kept on these expenditures to ensure they are accounted for in payroll or risk being ruled as non-deductible expenses to the company upon IRS examination.
Although the case of Weisselberg presents the most serious impacts of deducting personal expenses, all company owners should be aware of the correct way to account for these benefits to protect them and their employees during an IRS examination.
If you have any questions regarding the classification of benefits or payments to employees, please reach out to your GBQ representative.
Article written by:
Ryan Kilpatrick, CPA
Senior Manager, Tax & Business Advisory Services