 Hello and welcome to the session in which we will discuss fringe benefits as they relate to S corporation and specifically S corporation shareholders. The first thing we want to learn about is what are fringe benefits? Well, when you work for a company, you might be paid most likely on a weekly or bi-weekly or bi-monthly basis, asserting salary, which is fine That's how you are compensated. However, the company might offer other benefits to you, other than cash. Those we call those generally speaking fringe benefits. What are some examples? For example, gym membership, commuter benefits. For example, what I used to work in downtown Bethlehem, Pennsylvania The CPA firm would give me access to the parking lot that's adjacent to the office and the value of that Parking lot on a monthly basis used to be around 300 dollars per month So this was a benefit given to me not part of my salary But I will be able to park there every day so I can make it to work on time I don't have to worry about finding a parking spot workers compensation paid medical leave educational assistance for example, you might work for a company and they want to give you money to Finish your degree or learn some learn some new skill take take a new course. Well, guess what? They're gonna give you that benefit. It's called fringe benefit. Maybe they're gonna give you accidental insurance premium So on and so forth. The list is exhaustive, but this is a list of it So why do we have to learn about fringe benefits when it comes to S corporation before we proceed any further? I have a public announcement about my company farhat lectures calm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of Lectures multiple choice questions through false questions as well as exercises. Go ahead start your free trial today No obligation. No credit card required Here's why shareholders and S corporations may be employed by their corporation matter of fact Shareholder employee Employee is a common for a shareholder. What does that mean? It means most most S corporation are owned and the people that own them work at the corporation as well For example, I'll tell you about my company farhat lectures. I am a shareholder employee I own the company, but also I'm an employee of the company and that's very very common for S corporation the owners are also employees So what does that mean? It means when it comes to those benefits There's a certain tax treatment we need to be aware of so the tax treatment of the fringe benefit Received by the shareholder employees depend on the percentage of their ownership interests in the corporate stock and from the IRS perspective they look at two types of Ownership ownership with less than 2% interest and ownership 2% or more interest Simply put if you own less than 2% you are considered Basically a minor owner. It's it's basically not a big deal But if you own 2% or more of the stock then you are considered basically in quote a major in the rules apply to you So how do we define 2% a 2% shareholder is a shareholder who owns directly or by attribution Indirectly on any day of the taxable year More than 2% of the outstanding common stock or has more than 2% of the combined voting power of the corporate stock Now let's start with the shareholders that owns less than 2% interest Which is basically minor shareholders Well the fringe benefits paid on behalf of those shareholders They are deductible as ordinary business expense and not taxable to the employees. So simply put because they are not Owners of the company. What's the risk here? Let's let's talk about the risk. It's very important to understand this What will be the risk? Let me just show you what will be the risk the risk would be for example I will buy my my membership if I'm a shareholder employee of an S corporation I would let the corporation buy my gym membership and what I do I deduct my gym membership on my S Corporation expenses and I use it. I use it for my personal use Okay, or personal use vehicle. I will buy a company. I will buy a vehicle as Part of my S corporation asset then I use this vehicle for personal use Well, you guys see what the problem is if you own the company and using their asset What's happening is you are using it for personal use and Having the deduction for business purpose. So that's what they're trying to avoid simply put for someone who's less than 2% owner That's fine. If you give them those benefits those benefits are deductible by the business and not taxable to the employee The important part is not taxable to the employee. So you're not gonna give them the benefit then tell them at the end of the Year you are responsible for paying taxes For employees with more than 2% ownership most fringe benefit received by those employees Now, let's talk about employees with more than 2% ownership interests Well, most fringe benefit received by employees with more than 2% ownership interests are still deductible by the corporation and an arriving to net Business income. Well, those those are business expenses. However Notice they are deductible and taxable to the recipient employee. So let me give you a simple example Let's assume I Purchase my gym membership or for hot lectures the S corporation purchase my gym membership So when I look at my income statement or 1120 s, I will deduct my gym membership Okay, gym membership, you know, $300 yearly gym membership or whatever the amount is So I will deduct my gym membership. That's fine as fringe benefit However, when I get my W2 that 300 will appear on my W2 it will be reported to me as income that this this membership So otherwise if I can only deduct it and not report it that will be great But since I am an owner more than 2% owner. Well, you're gonna if you want to get the benefit Well, you are also responsible for paying taxes But if you are just an employee of the company That gym membership if they gave it you as a fringe benefit, it's tax free Now again some examples group life insurance now bear in mind accident and health insurance premium what they do They add them to your wages They're part of your wages, but they're not subject to FICA which is social security and food the federal unemployment tax So simply put they add them They add them to your wages now also again those accident and health insurance there They're also the they are part of your of your income, but they're also deductible. So basically it's a wash Okay, adoption assistance educational assistance meal and lot meals and lodging. There's an exception if you have if you have an exception applies to the contribution made by an escort operation to a qualified pension or profit-sharing plan So if the escort operation created a retirement some sort of a qualified pension or profit-sharing plan Guess what here? You're gonna get the benefit. They are deductible, of course by the corporation But this expense this qualified pension and profit-sharing the Contribution which are an expense to the escort operation are not taxable to the shareholder To the 2% shareholders. So if I created a qualified pension plan and I contributed some money within a limit There's a limit for that I can deduct it on my escort operation and that amount is not not taxable to me So this is a good benefit What should you do now go to far hat lectures and look at additional multiple choice through false exercises? That's gonna help you to deal with escort operation questions Whether you are a CPA candidate enrolled agent or in counting students. Good luck. Study hard Stay safe