Partnerships, limited liability companies ("LLCs") taxed as partnerships and S corporations have various tax advantages and are often chosen by owners of businesses as favored business structures. There are, however, some disadvantages to such structures; the owners can take advantage of fewer tax-favored and tax-free benefits than those that would be available as fringe benefits for employees of a "normal" C corporation. Nevertheless, some fringe benefits are available to partners in partnerships, members of LLCs, and substantial (more than 2%) shareholders of S corporations on a tax-free or tax favored basis. Those owners should survey their situation carefully to be sure that they are aware of, and taking advantage of, in appropriate cases, the available tax-free and tax-favored benefits. Those available benefits are outlined in this article.
Although the rules for fringe benefits expressly cover only partners (and thereby pick up LLCs taxed as partnerships), shareholders of an S corporation who own more than 2% of its stock are subject to the fringe benefit rules that apply to partners. For purposes of these fringe benefit rules, the partners are "employees."
Several benefits can be paid to partners and, in some cases, deducted by the partnership without any resulting income to the partner; these are tax free benefits to the partner. The partnership can pay job-related education expenses for the partner and deduct the cost without the partner recognizing income; this is slightly different from educational assistance programs (which can be used for job-related or unrelated education), where there are limits on the portion of the total benefits paid out that can be paid to owners of 5% of the partnership and their dependents. Similarly, payments can be made to partners under qualifying dependent care assistance programs, provided that no more than 25% of the amounts paid annually are paid to 5% owners of the partnership. Other tax-free benefits include job placement assistance and provision of an automobile (to the extent used for business). The personal use of the automobile is, of course, taxable to the partner as compensation income. If the partnership reimburses the partner for club dues, the reimbursement is not deductible by the partnership, but the portion of the dues allocable to business use can be received by the partner tax free.
There are also so-called "de minimis" benefits provided on an occasional basis, such as traditional birthday or holiday gifts of low value, event tickets, traditional awards (such as a retirement gift), and other special occasion gifts. Another de minimis fringe benefit is transportation assistance consisting of up to $21 per month of tokens or fare cards for public transit furnished to the partner by the partnership. These can all be given to the partner and their cost deducted by the partnership, without any resulting taxable income to the partner.
None of these benefits are, of course, individually of major consequence. Nevertheless, if a partner, part owner of an LLC or shareholder of an S corporation wants to maximize tax-free income from the entity, these fringe benefits can provide some avenues for doing so in appropriate cases. Each fringe benefit should be reviewed with professional advisors in light of the particular situation to determine whether it is available and appropriate.
If you want to learn more about benefit and compensation strategies and their place in your business, contact Lee Lundy at 410.752.9705 or via email.
This alert has been prepared by Tydings for informational purposes only and does not constitute legal advice.