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Pre-Tax Plan for Mechanics to Purchase Tools?


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#1 CSB

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Posted 26 April 2005 - 11:28 AM

A client has stated that he knows there is a pre-tax plan that "works just like a section 125 cafeteria plan" for mechanics (or auto-mechanics) to set aside pre-tax dollars to purchase tools. He just doesn't know the particulars and wants his company to participate. Anyone have any knowledge of such a plan?

#2 Katherine

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Posted 26 April 2005 - 12:34 PM

Depends on whether its an accountable (substantiated) or nonaccountable (unsubstantiated) reimbursement. If you meet the accountable plan rules, you can do it through a restructuring of the compensation arrangement -- at raise time or something -- so its not as noticeable. You would provide the "tool allowance" in place of dollars of compensation. If the employees account for the expenditures, the employer might be able to save FICA taxes on that portion of the compensation (its deducted by them as tools, not compensation). And the employees could save income and FICA taxes.

Many may not be legal:

http://www.irs.gov/b.....97388,00.html

#3 GBurns

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Posted 26 April 2005 - 02:01 PM

I have never seen a way to pre-tax this. Even assuming that the tool reimbursement program works. What would the mechanic be pre-taxing anyway?

Using an accountable plan would only apply to newly purchased tools that have not already been deducted (section 179, depreciation etc) under a previous year's tax return. So it should not be applicable to old in use tools.

It should also be impractical to use an accountable plan for small tools.

And as the IRS points out in the CIP, restructuring the compensation would not work.

What has the promoter been able to give as legal support that is relevant? Most of the IRS etc determinations that allow such arrangements involve large items definitely not hand tools or small tools.
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
www.costreductionstrategies.com(under construction)
www.employeebenefitsstrategies.com(under construction)

#4 Demosthenes

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Posted 26 April 2005 - 02:24 PM

The only place I've ever heard anything like this was where the service techs were classed as independent contractors making the tool purchase a deductible business expense. Happened to my brother-in-law who turned a wrench for years.

The whole thing fell apart because the "employer" couldn't pass the independant contractor requirements in the code. As you can imagine, the whole thing ended badly.

#5 Katherine

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Posted 26 April 2005 - 02:57 PM

It seems like it would work same way that some cell phone reimbursement program operate for professionals and sales people who need to be available to clients all day long. The employer might specify a monthly ceiling -- e.g., $50. Then the employees turn in the business part of their monthly bill. If they spend less, they get the lesser amount. If they spend more, then they still only get $75. It allows the employer to budget expenses and provides the employees more flexibility in what service and plan they want to choose.

#6 GBurns

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Posted 26 April 2005 - 04:01 PM

There are big differences.

In the cell phone scenario there is an actual monthly expenditure by the employee that is being reimbursed. The use of the cell phone is also for the convenience of the employer and so are the related expenses. The employee is also able to substantiate the expense and does so in a timely manner.

With the small tools, the tools are part of the employees "dress" or working conditions as mentioned in the CIP. The tools are what the employee uses to do the job, no different from the salesman's pen.

In the cell phone scenario there is no recharacterization of income, only a reimbursement of an incurred expense.

In the cell phone scenario there is no pre-taxing of anything.
George D. Burns
Cost Reduction Strategies
Burns and Associates, Inc
www.costreductionstrategies.com(under construction)
www.employeebenefitsstrategies.com(under construction)