Please note the information below is intended to provide generalized information that is appropriate in certain situations.  It is not intended or written to be used, and it cannot be used by the receipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer.  The contents of the information provided below should not be acted upon without specific professional guidance.  Please call us if you have any questions.

A regular C corporation (but not an S corporation or partnership) may pay and deduct the cost of tax favored fringe benefits otherwise not deductible, or deductible only to a limited extent under other forms of operation. These benefits include the following:

• The health and accident plan exclusion from income

• Employer payments to health and accident plan exclusion from income

• Group term life insurance exclusion from income

• Exclusion of the value of meals and lodgings provided for the convenience of the employer, which is of limited value for most professionals, but possibly of value for some health services providers.

Benefits valued at $3,000, for example, if tax-free, are the equivalent of $4,000 taxable to an individual in a 25-percent tax bracket. If the corporation is in a zero tax bracket, the shareholder-professional is the sole shareholder, and the corporation does not have to provide benefits to other employees, the shareholder professional would receive tax savings of $1,000. If the corporation is in an above-zero tax bracket, the after-tax cost to the corporation would be reduced, whereas the shareholder’s savings would remain the same.

If the fringe benefit is one that must be made available to non-owner employees on a nondiscriminatory basis, the corporation must weigh the cost of providing it to the other employees. To the extent that the cost of covering other employees serves to hold down direct compensation costs or promotes goodwill, loyalty, and productivity, the cost of coverage may well be offset.