Discussion:What is the rule for tuition paid on behalf of a 2% shareholder?
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Discussion Forum Index --> Tax Questions --> What is the rule for tuition paid on behalf of a 2% shareholder?
| 12 September 2007 | |
| Does Sec 127 allow up to $5250 annually and treat 2% shareholders as employees? Does Sec 132 view 2% shareholders the same re tuition considered a working condition fringe? I am so confuesed. The issue is a client spent $11K on tuition towards an MBA and has asked if his S Corp can deduct any of it. Thanks. | |
TheTinCook (talk|edits) said: | 13 September 2007 |
| You probally can't use a Sec. 127 EAP since the program can't provide more then 5% of its benefits to a 5% or more shareholder; and the plan can not discriminate in favor of highly compensated employeeys (i.e. 5% or more shareholders.)
You may be able to do it under Sec. 132(d), but it has to be related to the trade and business of the S-Corp, and the employee would need to be able deduct as an unreimbursed business expense if the corp was not reimbursing the expense. The discrimination rules don't apply to this type of fringe benefit. | |
| 13 September 2007 | |
| I see no problem with deducting the cost of the MBA program at the corporate level. However, the real question is whether the shareholder can exclude such benefits from gross income. Section 127 and 132 benefits are not excludible by 2% shareholders since 127 and 132 are only available to employees, and 2% shareholders are treated as partners for fringe purposes.
Although Sec. 132 and Sec. 127 does not apply to 2% shareholders, I see no problem with excluding continuing education costs from gross income as long as the MBA is related to the employee’s present occupation and does not prepare the shareholder for a new profession or occupation. | |
TheTinCook (talk|edits) said: | 13 September 2007 |
| "I see no problem with deducting the cost of the MBA program at the corporate level. However, the real question is whether the shareholder can exclude such benefits from gross income"
Thank you for pointing that out. I forgot to mention that. Ok, so Sec 1372, precludes a 2% shareholder from being treated as an employee for all fringe benefits? So then the shareholder will be on the hook for FIT and SE tax for that benefit? Wouldn't the amounts be on the W-2 somewhere? I'm a little confused since the other sources specifically exclude 2% S Corps shareholder from certain benefits (i.e. Health insurance, achievment awards, etc). In others such as the working condition fringe benefit, it doesn't mention any such exclusion of 2% S Corp shareholders. I also fail to see how you would plan to exclude the education from gross income. 2106? UPE? Tution/Fees deduction? Pardon my obtuseness. | |
| 13 September 2007 | |
| Found this article:
http://www.businessweek.com/smallbiz/content/jul2007/sb20070717_495758.htm?chan=search | |
TheTinCook (talk|edits) said: | 13 September 2007 |
| Interesting article, but it does not talk about how the shareholder would treat the tuition if the S-Corp deducted it. | |
| 14 September 2007 | |
| The exclusion for tuition would not be claimed under 127 or 132. Instead, it would be claimed under 1372. Under 1372, the S corporation is treated as a partnership, and the 2% shareholders are treated as partners in that partnership. A partner would not include continuing education costs as gross income, and neither should a 2% shareholder. | |
TheTinCook (talk|edits) said: | 14 September 2007 |
| I see now. Thanks Riley! | |
| 1 July 2008 | |
| Let me see if I am clear. If a partnership pays for the MBA expenses of one of its partners, the partnership could take the deduction as an ordinary and necessary business expense under 162. The partner could then exclude the tuition under IRC 1372. If the tuition is considered a working condition fringe benefit (as the partnership is the employer in this case) then ALL of the tuition is excludable from partner's income as long as the MBA is related to the employee’s present occupation and does not prepare the partner for a new profession or occupation. | |
Death&Taxes (talk|edits) said: | 1 July 2008 |
| PPC's Tax Action Memo dated 6/6/08 ["How to treat fringe benefits provided to pass-through Entity Owners"] provides two columns in an Appendix, one being 'Ttreated as Partners' and the other "Treated as Employees" and it lists a qualified educational assistance program [Sec 127] under Treated As Employee, saying that the benefits can be provided tax-free to partners and more than 2% shareholders on the same basis as other employees. However, it goes on to state that 'no more than 5% of the benefits during the year may be provided to more-than-5% owners (or their spouses or dependents)." | |
