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Focus on Small Business: Partnership Fringe Benefits

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In certain instances a partner may have to recognize income on normally tax-favored fringe benefits provided to employees. When a partnership provides benefits to a partner the benefit will either be treated as a guaranteed payment to the partner or as a non-taxable fringe benefit other employees benefit from. Instances from both conditions are listed.
January 20, 2014

In certain instances a partner may have to recognize income on normally tax-favored fringe benefits provided to employees. When a partnership provides benefits to a partner the benefit will either be treated as a guaranteed payment to the partner or as a non-taxable fringe benefit other employees benefit from. Instances from both conditions are listed below:

Treated as a guaranteed payment

  1. Premiums for accident and health insurance coverage for the partner, spouse, and dependents
  2. Group term life insurance coverage of up to $50,000 per partner
  3. Disability insurance coverage
  4. Medical reimbursement plans
  5. Meals or lodging furnished for the convenience of the company
  6. Cafeteria plan
  7. Qualified transportation fringes
  8. Qualified employee achievement program
  9. Qualified adoption assistance program
  10. Health savings accounts (HSAs)
  11. Qualified moving expense reimbursement

Treated as a non-taxable fringe benefit – (Partner must perform services for the partnership)

  1. Qualified educational assistance program
  2. Qualified dependent care assistance program
  3. No-additional-cost services
  4. Qualified employee discounts
  5. Working condition fringe benefits. These include the business-use portion of a company-provided vehicle, business-use portion of company-paid country club dues (even though nondeductible by the company), company-paid job-related education expenses, and job placement assistance.
  6. De minimis fringe benefits
  7. On-premises athletic facilities
  8. Qualified retirement planning services
  9. Employer provided cell phone

The partnership will get a deduction for the benefits provided however the partner may or may not have to record the benefit as income. For example when a partnership pays the premiums on a partners health insurance plan this amount will be recorded as a guaranteed payment to the partner and deducted by the partnership as an employee benefit expense. In this instance the partner can then deduct the medical expenses on their Form 1040 (subject to limitations). Only amounts that qualify as medical expenses or other specifically deductible items at the partner level can be deducted on the partner’s Form 1040. When an employer provides a benefit such as a business cell phone there would be no taxable event to the partner and the partnership would receive a deduction.

 

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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