Proper Administration of Tool Tax Reimbursement Programs

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.