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Minimize Your Train Pain
Tax and Financial News
September 2001
Minimize Your Train Pain
Despite the recent spate of layoffs from the dot coms and other technology companies, good people are still hard to find and keep. This means we, as employers, are struggling to find new and innovative ways to keep our employees in the fold and productive. In other words, we have to keep our employees happy.
Even with the new perks we have to offer, one way to keep our employees happy is an old-fashioned notion - training. It's not a very glamorous perk nor is it necessarily a high-tech goodie we offer our employees, but it is a significant benefit and, done right, a significant expense. It's the expense and how to take maximum advantage of it that we want to talk to you about this month.
Fortunately for U.S. taxpayers, the Internal Revenue Code recognizes that productive employees aren't the employer's right, but the employer's responsibility to shape. That recognition comes through several tax code sections that allow employers current deductions for training and education costs paid on behalf of employees.
You may not realize it, but you incur training costs every day. Sometimes theyâre the obvious ones like transportation, meals and lodging. Sometimes theyâre disguised as simple instructions on how to use a new telephone system or correcting an employee's mistake. Whatever the source, training costs money and you need to plan to maximize your deductions. So let's take a look at the major costs you may incur.
On The Job Training
There's nothing quite like experience to train an employee in how to get the job done. While it has the distinct disadvantage of taking you or another supervisor away from more profitable activities, it has one major advantage - little or no additional costs. Hey, you're going to pay yourself the same whether you work eight or ten hours anyway, aren't you? It has one other very big advantage - all things being equal, there is little likelihood that the IRS can take issue with the full deductibility of normal salary expenses.
Formal In-House or In-town Training Programs
In-house training programs are close to what some folks may think of as on-the-job-training, but since they take your employees away from their duties, theyâre not quite the same. However, assuming they enhance the employees' ability to do their jobs, you most likely won't get an argument out of the IRS on deducting them. About the only time youâll run into a problem is if the cost is significant and incurred as start up costs on a new line of business. Most of the time, however, these costs are deemed to be incurred in the ordinary course of your existing business.
In-town training costs are those you incur to send your employees to local training facilities. About the only cost you would incur here is mileage or other transportation expense, along with the time the employee spends away from their primary duties. Again, these costs generally are fully deductible.
Convention or Out-of-Town Seminars
Now weâre getting to the fun part of the deductibility calculations. Out-of-town travel can take many forms and can include a substantial number of people who may not incur deductible costs.
First, lets get a few things straight. If youâre a civil engineer and go to Las Vegas for a week of fun with the family, dropping by Hoover Dam to discuss it's structural integrity with the tour guide will not qualify the trip as a business trip. If you intend on deducting the travel costs, the trip must be intended to further your or your employer's business. Trips taken primarily for leisure will not fit the bill.
Let's say your main reason for going to Las Vegas is to attend the National Civil Engineers convention and you bring the family along. In this case, your transportation costs will be deductible, but forget about the rest of the family, unless your wife is a civil engineer and also attends the convention.
Sometimes, travel to conventions is coupled with pleasure trips. If the primary reason is to attend the training and you can substantiate you would have incurred the transportation expense regardless of when you traveled, it will be deductible.
Meals, lodging and incidental expense incurred on a trip primarily for business are deductible. Of course, youâll be limited to a 50% deduction on any meals and entertainment. If your travel is part business and part personal, the personal portion of the meals, lodging and incidentals will be nondeductible.
If youâre going on a training trip outside the United States, special rules apply. First, the trip must be primarily for business. You are presumed to be on the trip entirely for business if 1) you spend less than 25 percent of your time on non-business activities, 2) the time away does not exceed one week, 3) you do not have substantial control over arranging the trip and 4) personal vacation is not a major consideration for the trip.
The fact that personal vacation is not a major consideration for the trip is key. If it is a major consideration for taking the trip, you will be required to allocate the expenses you incur between deductible and nondeductible expenses. If vacation is the primary reason for the trip, you can forget taking any deductions.
Assuming you don't meet the "entirely for business" test, but do meet the âprimarily for businessâ criteria, some portion of the trip will be deductible. The deductible portion will be based on an allocation dependent on the activities taking place each day. In general, you would take the total business days divided by the total days out of the country, times your total costs to allocate the expenses between deductible and nondeductible costs. Special rules and limitations apply to costs of cruises also.
Of course, the cost of registration fees and tuition associated with the seminars or conventions will be a fully deductible cost, assuming you meet the business purpose tests. Costs incurred to attend investment seminars are not deductible.
Higher Education Expenses
The new law enacted in 2001 extended and made permanent the exclusion of employer paid education costs from an employee's income. The maximum excludible amount is $5,250 and applies to undergraduate and graduate courses for years beginning after December 31, 2001. Prior to December 31, 2001, only assistance provided for undergraduate courses qualifies. There are a number of hoops to jump through to qualify for this exclusion, so give us a call before you take the plunge into higher education assistance for your employees.
Conclusion
Training for your employees represents a significant investment in your future and that of your employees. Properly handled, you can deduct most, if not all of the cost of training, especially out-of-town training. However, you do have to be careful and that is where we come in. If youâre thinking of taking a trip to a convention or other seminar, give us a call and let's discuss how you can enjoy the trip to the fullest while deducting the cost from your taxable income.
Have a great September!
Even with the new perks we have to offer, one way to keep our employees happy is an old-fashioned notion - training. It's not a very glamorous perk nor is it necessarily a high-tech goodie we offer our employees, but it is a significant benefit and, done right, a significant expense. It's the expense and how to take maximum advantage of it that we want to talk to you about this month.
Fortunately for U.S. taxpayers, the Internal Revenue Code recognizes that productive employees aren't the employer's right, but the employer's responsibility to shape. That recognition comes through several tax code sections that allow employers current deductions for training and education costs paid on behalf of employees.
You may not realize it, but you incur training costs every day. Sometimes theyâre the obvious ones like transportation, meals and lodging. Sometimes theyâre disguised as simple instructions on how to use a new telephone system or correcting an employee's mistake. Whatever the source, training costs money and you need to plan to maximize your deductions. So let's take a look at the major costs you may incur.
On The Job Training
There's nothing quite like experience to train an employee in how to get the job done. While it has the distinct disadvantage of taking you or another supervisor away from more profitable activities, it has one major advantage - little or no additional costs. Hey, you're going to pay yourself the same whether you work eight or ten hours anyway, aren't you? It has one other very big advantage - all things being equal, there is little likelihood that the IRS can take issue with the full deductibility of normal salary expenses.
Formal In-House or In-town Training Programs
In-house training programs are close to what some folks may think of as on-the-job-training, but since they take your employees away from their duties, theyâre not quite the same. However, assuming they enhance the employees' ability to do their jobs, you most likely won't get an argument out of the IRS on deducting them. About the only time youâll run into a problem is if the cost is significant and incurred as start up costs on a new line of business. Most of the time, however, these costs are deemed to be incurred in the ordinary course of your existing business.
In-town training costs are those you incur to send your employees to local training facilities. About the only cost you would incur here is mileage or other transportation expense, along with the time the employee spends away from their primary duties. Again, these costs generally are fully deductible.
Convention or Out-of-Town Seminars
Now weâre getting to the fun part of the deductibility calculations. Out-of-town travel can take many forms and can include a substantial number of people who may not incur deductible costs.
First, lets get a few things straight. If youâre a civil engineer and go to Las Vegas for a week of fun with the family, dropping by Hoover Dam to discuss it's structural integrity with the tour guide will not qualify the trip as a business trip. If you intend on deducting the travel costs, the trip must be intended to further your or your employer's business. Trips taken primarily for leisure will not fit the bill.
Let's say your main reason for going to Las Vegas is to attend the National Civil Engineers convention and you bring the family along. In this case, your transportation costs will be deductible, but forget about the rest of the family, unless your wife is a civil engineer and also attends the convention.
Sometimes, travel to conventions is coupled with pleasure trips. If the primary reason is to attend the training and you can substantiate you would have incurred the transportation expense regardless of when you traveled, it will be deductible.
Meals, lodging and incidental expense incurred on a trip primarily for business are deductible. Of course, youâll be limited to a 50% deduction on any meals and entertainment. If your travel is part business and part personal, the personal portion of the meals, lodging and incidentals will be nondeductible.
If youâre going on a training trip outside the United States, special rules apply. First, the trip must be primarily for business. You are presumed to be on the trip entirely for business if 1) you spend less than 25 percent of your time on non-business activities, 2) the time away does not exceed one week, 3) you do not have substantial control over arranging the trip and 4) personal vacation is not a major consideration for the trip.
The fact that personal vacation is not a major consideration for the trip is key. If it is a major consideration for taking the trip, you will be required to allocate the expenses you incur between deductible and nondeductible expenses. If vacation is the primary reason for the trip, you can forget taking any deductions.
Assuming you don't meet the "entirely for business" test, but do meet the âprimarily for businessâ criteria, some portion of the trip will be deductible. The deductible portion will be based on an allocation dependent on the activities taking place each day. In general, you would take the total business days divided by the total days out of the country, times your total costs to allocate the expenses between deductible and nondeductible costs. Special rules and limitations apply to costs of cruises also.
Of course, the cost of registration fees and tuition associated with the seminars or conventions will be a fully deductible cost, assuming you meet the business purpose tests. Costs incurred to attend investment seminars are not deductible.
Higher Education Expenses
The new law enacted in 2001 extended and made permanent the exclusion of employer paid education costs from an employee's income. The maximum excludible amount is $5,250 and applies to undergraduate and graduate courses for years beginning after December 31, 2001. Prior to December 31, 2001, only assistance provided for undergraduate courses qualifies. There are a number of hoops to jump through to qualify for this exclusion, so give us a call before you take the plunge into higher education assistance for your employees.
Conclusion
Training for your employees represents a significant investment in your future and that of your employees. Properly handled, you can deduct most, if not all of the cost of training, especially out-of-town training. However, you do have to be careful and that is where we come in. If youâre thinking of taking a trip to a convention or other seminar, give us a call and let's discuss how you can enjoy the trip to the fullest while deducting the cost from your taxable income.
Have a great September!
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.
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