As we find ourselves rounding the curve into the latter half of 2017, it’s the ideal time to start forecasting for the many to-dos that come with the quickly approaching year’s end. While the final calendar months are laden with fun, it also comes at a time when businesses and employees are working to close the chapter on various business initiatives. When it comes to tying up all things payroll, the IRS has created the Special Accounting Rule in aims to provide relief when it comes to capturing and accounting for all the employee transactions that occurred throughout the year. Give yourself an early holiday gift by taking advantage of this special rule – keep reading to learn how you can utilize it.
According to IRS Publication 15B, the Special Accounting Rule allows the value of taxable noncash fringe benefits* provided during the last 2 months of the calendar year, or any shorter period within the last 2 months, as paid in the next year. These benefits need to be treated as paid no less than annually. All business types (LLC’s, S Corps, Non-Profits, etc.) are allowed to use the Special Accounting rule.
There are a handful of restrictions when using this rule. A business does not have to use the same time period for all benefits, but the treatment must be consistent for all employees who receive that particular benefit. Secondly, your employees must be informed of the time period used near the date when the W2 is provided. Finally, employees must also use that time period for the benefit. This rule cannot be used for tangible or intangible personal property.
For the year ending on December 31, 2017, a business can use the period of November 1, 2016 through October 31, 2017, to estimate the value of taxable noncash fringe benefits for an employee. Two months before the end of the year, you and your employee will know the annual amount of the fringe benefit, meaning you won’t need a last minute Hail Mary at year end to update W2 earnings.
Sam has a company car, but has used the vehicle for personal purposes in a few instances. Using the Annual Lease Value method, we can determine the employee’s taxable fringe benefit using the Special Accounting Rule as follows:
Total Personal Miles Driven: 11/1/2016 – 10/31/2017: 3,000 miles
Total Miles Driven: 11/1/2016 10/31/2017: 12,000 miles
IRS Annual Lease Value: $6,100
Calculating personal use percentage:= 3,000/12,000 = 25%
2017 income for personal use of a company car: 25% x $6,100 = $1,525
The business can then include this income on Sam’s remaining check(s) paid in 2017 so that the appropriate taxes are collected and paid.
Use of the Special Accounting Rule allows businesses to determine income from taxable fringe benefits for up to two months prior to the end of the year, and helps ensure that employers withhold and collect the appropriate taxes for this income. Finally, it can also take a big item off your end of year to do list, giving you more freedom at work and for the holidays. So this holiday season, we urge you to make the most of this!
*Noncash fringe benefits are a form of pay for services performed. Examples include personal use of company vehicles, educational assistance, and company provided cell phones.
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