In my previous article, I wrote about how technicians can get reimbursed for the taxable portion of the money they have invested in their tools. This week I will focus on how accountable plans for technicians and their tools must be administered to meet IRS scrutiny. Tool tax reimbursement programs (or accountable plans for technicians) must be able to display compliance on the three pillars of the IRS code on accountable plans to ensure correct reimbursement. The three pillars are: ensuring that the tools have a business connection, that the employees have a method to show substantiation of value of tools and that there is a return of excess (to IRS).Business Connection.A technician must show a “business connection” and can only claim the tools strictly used for the job he/she is performing for the company that offers a tool tax reimbursement program for technicians. A technician is allowed to be reimbursed for the taxable portion of the tool investment in the past regardless of acquisition as long as the tool is being utilized for his current job. In addition to tools, a technician may also be reimbursed for his certification, which in most cases is required to perform his/her duties, education, uniforms, footwear, eyewear (for his job) and interest or finance charges related to the performance of his/her job. As long as a “connection” can be made to the job, then it is recognized as a valid reimbursable event. Tools purchased by technicians but not utilized at work are not reimbursable.Substantiation.Any tool or defined reimbursable event must be substantiated by a receipt or by a conservative method of a written statement establishing the competent evidence and proof of the tool. In other words, receipts are not always easily produced and the IRS has allowed third party accountable plan administrators to assist technicians to document the value of the tools and provide a description of the tool. The value of tools reported to the IRS must be a conservative estimation to avoid tax avoidance. Most professional tools have a lifetime manufacturer’s warranty, but the IRS may not necessarily give the full value of the tool as a deduction. Some administrator plans utilize present fair market value (FMV) on all tools without receipts, which the IRS may deem unrealistic and view as an attempt to defraud the government of taxes. It is better to utilize an administrator that uses a more conservative approach to substantiating tool values to avoid problems with the IRS.Return of Excess.The third pillar of accountable plans for technicians is the “Return of Excess”. Return of Excess means that no more that than the value of the tool may be claimed. If more than the value is claimed, then the taxpayer owes and “excess” to the government. Some plan administrators encourage technicians to use present value (PV) or current fair market value (FMV) for all tools to attempt to “maximize” pre-tax amount returned to technicians. This method is easily dubious to the IRS, especially if the total value of a set is substantial. Other plans allow technicians to remain on programs indefinitely collecting tax free income. This plan is illegal and will have ramifications to the technician and the employer. The IRS will view this as a means in avoiding tax obligations. Lastly, technicians are not allowed to be reimbursed for tools that have been previously itemized on previous personal tax returns. If a technician has a substantial set of tools, he must show receipts or a good mix of depreciation to substantiate the value of his tools. A strict and conservative method of total compliance must be adhered to avoid defrauding the government of taxes.In summary, not all tool tax reimbursement programs are alike. Utilizing an administrator that abides by the three pillars will mitigate potential problems with the IRS. Tool tax reimbursement administrators must abide by the three pillars of the IRS code on accountable plans. Anything less than the three pillars is a potential for problems.
Did you know that when you call a state’s Department of Revenue and receive verbal guidance on a sales or use tax issue, and the guidance you received later turns out to be incorrect, you or your business could be held liable for any assessed tax, penalty or interest that may result from following the guidance you received? One way around this is to write a formal letter to a state’s Department of Revenue detailing your question(s) and asking the Department provide a written “ruling” on the taxability of the issue. Many individuals and businesses are not aware that they may request written guidance on a particular sales or use tax issue, that in turn, may help protect the business from a potential audit assessment. A formal request for tax guidance is generally referred to as a ruling request or private ruling letter. For sales and use tax purposes, a ruling request will generally relate to the taxability of a product, individual or pending business purchase and the circumstances that surround the transaction.For example, a business selling tools in a rural area may have customers who wish to claim exemption from sales tax on their purchase of wire cutters and other tools. The customers have stated that the tools will be used in agricultural production and that the purchase of the tools should be exempt from tax under the state’s legislatively enacted sales tax exemption for agricultural producers. However, because the business owner is not sure if the tools qualify for tax exemption or not, and rather than just call the state for verbal advise that may not be relied upon in a sales tax audit, the store owner decides to write a letter to the state’s Department of Revenue requesting the Department “rule” on the taxability of the wire cutters and other tools sold for use in agricultural production.Having a formal “ruling” from the state will not only help protect the business in an audit, it may also be used to demonstrate to the business’s customer that the state’s Department of Revenue has already determined whether the tools are taxable or not when sold to agricultural producers. If the tools were sold exempt from tax without first having determined whether the sale qualifies for exemption or not, the business could be held liable for any and all tax due on those sales plus assessed penalties and interest.While this is only one small example of how a ruling request may help solve a sales tax issue, it does demonstrate how a written “ruling” from a state Department of Revenue can benefit both the business and its customers. It is important to note that a Department of Revenue ruling only applies to the entity and circumstances included in the ruling request.
States handle ruling request differently, so be sure to check to see what the procedures are for requesting a written ruling. In addition, almost all ruling letters are made public and can be found on a state’s Department of Revenue web site. It may be a good idea to look over a few of the published rulings to determine how best to craft your letter.In addition, if it were determined that the tools qualified for exemption from sales tax, a state certificate of exemption for agricultural producers may need to be completed by the customer and kept on file at the store for audit purposes. You can find additional information on the sales and use tax by reading “A Guide to Sales and Use Tax”.