FEDERAL STATE AND LOCAL GOVERNMENTS and

FEDERAL STATE AND LOCAL GOVERNMENTSand PUBLIC ENTITIES WORKING TOGETHER "HAND IN HAND"

TAX EXEMPT/GOVERNMENT ENTITIES: • Federal, State and Local Governments • Indian Tribal Governments • Tax Exempt Bonds

FSLG FIELD SPECIALISTS • Visit us at www.irs.gov/govts • FSLG Customer Services • Publication 3809 (Rev. 7/2005) • Indiana Field Specialists Raelane Hoff, CPA 812-234-6815 x227 Beverly Elsner, CPA 812-378-1254

FSLG MISSION: • To provide government entities with top quality service • by helping them understand and comply with applicable tax laws, and • to protect the public interest by applying the tax laws with integrity and fairness to all

IMPORTANT NOTE: • The information published by the IRS is the authoritative guidance that state and local governments should follow. If your situation is unique, or if clear guidance is not set forth in the IRS publications, you may either contact your local IRS representative or seek a technical ruling on the matter

TOPICS: • FRINGE BENEFITS • ACCOUNTABLE PLANS • EMPLOYEE VS. INDEPENDENT CONTRACTOR

WHAT IS A FRINGE BENEFIT?

FRINGE BENEFITS: • ANY PROPERTY, SERVICE OR CASH (Other than Salary, Provided by Employer) • TAXABLE UNLESS EXCLUDED SPECIFICALLY BY LAW • Example: Medical Premiums IRC 106

WHAT TO DO? • Identify specific benefit provided to employee(s); • Determine if benefit is excluded by law; and • Determine if benefit is fully taxable, or only partially. • IRS Publication 15-B

NON-TAXABLE FRINGE BENEFITS: • No additional cost service • Qualified employee discounts • Working condition fringe • De minimis fringe • Qualified transportation expenses • Qualified Moving Expense Reimbursements

TAXABLE FRINGE BENEFITS: • INCLUDE in Employee’s wages and on W-2 (Never on 1099-MISC) • Subject to Federal Withholding, Social Security and Medicare • Even if benefit is received by/for spouse or child of employee

ACCOUNTABLE PLAN • Business Connection • Adequate ‘accounting’ by employee in reasonable time period • Excess reimbursement returned in a reasonable time period

NON-ACCOUNTABLE PLAN: • DOES NOT MEET ALL 3 REQUIREMENTS FOR AN ACCOUNTABLE PLAN • BENEFIT IS FULLY TAXABLE WHEN PAID

NON-TRAVEL FRINGE BENEFITS: • Clothing • Equipment • Professional Licenses • Awards • Bonuses

Work Clothes, Uniform Allowances and Reimbursements • Excluded if: • Specifically required as a condition of employment AND • Not worn or adaptable to general usage as ordinary clothing • Rules of Accountable Plan must be met • If Employer provides clothing must meet same criteria

Safety Equipment • Costs/Reimbursements are excludable if: The equipment helps the employee perform his or her job in a safer environment

Cell Phones/Electronic Devices & Computers • Considered listed property • Employees are required to account for business and personal use • If substantiation requirements are not met, all use is included in the wages of the employee • For this issue, it is advisable to contact the IRS directly with regard to your situation

AWARDS ARE TAXABLE • CASH PRIZES OR AWARDS are always taxable • PERFORMANCE AWARDS are always taxable • NON-CASH: • Use Fair Market Value

AWARDS EXCEPTIONS: • Certain Awards transferred to Charities • Pulitzer, Nobel Peace Prize • Certain Employee Achievement Awards • Length of Service, Safety - Not Cash • Nominal Holiday/Special Occasion Awards • Coffee mugs, plaques, etc.

REMEMBER: • If the benefit is taxable: • Determine the Value of the benefit • Include it in Wages and W-2

TRAVEL-RELATED FRINGE BENEFITS: • Per Diem Allowances • for lodging, meals and/or incidentals • for business related travel • while away from home

MEAL ALLOWANCES WHILE TRAVELING ON BUSINESS: • MEALS AWAY FROM HOME: • OVERNIGHT • Accountable Plan - Not taxable • NOT OVERNIGHT • Taxable as wages

MEAL ALLOWANCES WHEN NOT TRAVELING: • Meals with business meetings - • NOT taxable if: • clear business setting • directly related • Employer buys you lunch - • Taxable as wages

AUTOMOBILE EXPENSES: • EMPLOYEE CAR USED FOR EMPLOYER’S BUSINESS: • 2006 Federal Mileage Rate $.445 • At this rate or less: Non-taxable to Employee • Excess over this rate: Taxable to Employee - only the excess amount • If Employee chooses not to get reimbursed, cannot claim on personal tax return. • Substantiation required

SUBSTANTIATION: • Employee reports to Employer: • Date, Purpose, Place of each trip • Mileage ‘at or near the time’ incurred • Examples: Diary, log, trip sheet, expense statement or similar record • Commuting is always taxable - it is non-business travel

EMPLOYER-PROVIDED VEHICLE: • HOW DOES EMPLOYEE ACCOUNT FOR PERSONAL USE? • Personal Use is taxable • Verified Business Use is not taxable • Employee can reimburse Employer for personal use

Personal Use: • IF NO RECORD KEPT: • Value of ALL use is taxable • IF RECORD KEPT: • Only Personal Use is taxable

Qualified Nonpersonal Use Vehicles • A qualified nonpersonal use vehicle is excludable from taxable wages if: the employee is not likely to use the vehicle more than minimally for personal purposes because of its design

Qualified Nonpersonal Use Vehicles • General list of qualified nonpersonal use vehicles used by governments • Clearly marked police & fire vehicles • Unmarked vehicles used by law enforcement officers if the use is officially authorized • Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds

Qualified Nonpersonal Use Vehicles • Modified Pick-up Trucks • Considered a qualified nonpersonal use vehicle (and therefore nontaxable) if it has been specially modified so it is not likely to be used more than minimally for personal purposes. Vehicle qualifies if it is: • Permanently affixed with decals or special paint associated with government function AND meets either of the following:

Qualified Nonpersonal Use Vehicles • Equipped with at least one of the following: Hydraulic lift gate Permanent tanks or drums Permanent side boards or panels that materially raise the level of the sides of the truck bed Other heavy equipment • It is used primarily to transport a particular type of load

VALUING PERSONAL USE • General Valuation Rule • Special Valuation Rules • Automobile Lease Valuation Rule • Cents-Per-Mile Rule • Commuting Rule

Special Valuation Rule Requirements • Employer and Employee must timely report personal use as wage • Rules apply on a vehicle by vehicle basis • Employer may use different rules for different vehicles

GENERAL VALUATION RULE: • Compute Personal Use • Determine what employee would pay to lease auto (FMV) • Multiply FMV by % of personal use

Annual Lease Valuation Rule • Determine value of employer provided vehicle by using Annual Lease Value Table Publication 15-B • Reduce lease value by amount excluded as working condition benefit • Consistency requirements apply

Annual Lease Valuation Rule • Lease value is based on a four year term • Lease value does not include value of any fuel you provide to employee for personal use, whether you provide it, reimburse its cost, or have it charged directly to employer • Value of fuel provided is included in employee wages at fair market value OR $.055 cents for ALL miles driven by employee

Cents Per Mile Rule • Cents per Mile Rule can apply if: Reasonably expect the vehicle to be regularly used in your trade or business throughout the calendar year, OR The vehicle meets the mileage test • Maximum automobile value for first available use in 2006 is $15,000 for autos and $16,400 for trucks and vans

Cents Per Mile Rule • Regular use in trade or business: At least 50% of vehicle’s total annual mileage is for your trade or business, or Vehicle is used in commuting pool to drive at least three employees to and from work, or Vehicle is regularly used in your trade or business on the basis of all facts and circumstances

Cents Per Mile Rule • Mileage Test Criteria: • Vehicle is actually driven at least 10,000 miles during the year • Vehicle is used during the year primarily by employees (includes commuting by employee on a consistent basis) • Both elements must be met for Mileage test

Cents Per Mile Rule • Cents per mile rate includes fuel provided by employer; if fuel is not provided rate can be reduced by no more than $.055 per mile • Consistency requirements apply

Commuting Rule Commuting rule can apply if: Vehicle is owned or leased by employer Vehicle is provided for business use Employer REQUIRES the employee to use the vehicle Employer has a written policy prohibiting personal use (other than commuting) Employee does not use the vehicle for other than de minimis personal use

Commuting Rule • If criteria are met, the taxable benefit is $1.50 each way for every day worked • Cannot be used for a “Control Employee”—an elected official or an employee with compensation at Executive Level V ($133,900 in 2006) • Control Employees must use “General Valuation Rule” or other “Special Automobile Valuation Rules” • Employee must account for their personal vs. business mileage

Rules for Withholding, Depositing and Reporting • Valuation of Fringe Benefits • Withholding and Depositing Taxes • Amount of Deposits • Forms 941 and W-2

Valuation of Fringe Benefits • In general, the actual amounts must be determined by January 31st of the following year • Because of the difficulty in establishing the value of certain benefits, a special accounting rule allows you to optionally treat fringe benefits paid in November and December as received in the next year • Prior to that, they can be estimated for the purposes of withholding and making tax deposits

Valuation of Fringe Benefits • Special Accounting Rules-Automobiles • Employer can elect not to withhold FIT • Employer must tell employee • Employer includes in wages/ W-2

Withholding & Depositing Taxes • Employer can elect to defer withholding • Can either add benefits to regular wages and compute taxes on the total, or • Withhold FIT at a flat 25% of taxable fringe You may need to consult with your software vendor for your particular Payroll program

Amount of Deposits • If estimating: • Make a reasonable estimate based on the expected cost of the fringe benefits • Failure to deposit penalty may be imposed for estimates that are too low

Forms 941 and Forms W-2 • Must report actual amounts on Form 941 and Form W-2 • Include fringe benefits in Box 1 and also Box 3 and Box 5 if applicable • The total value of fringe benefits can be reported in Box 14 of the W-2 • Refer to Publication 15-B for additional information

EMPLOYEE OR INDEPENDENT CONTRACTOR? • Determine Worker Status • Fringe benefit rules apply • Accountable Plan rules apply • Report payments on information return: • W-2 for Employee • 1099-MISC for Independent Contractor

THE IRS LOOKS ATTHREE FACTORS TO DETERMINE WORKER STATUS: • BEHAVIORAL CONTROL • FINANCIAL CONTROL • RELATIONSHIP OF PARTIES

FEDERAL STATE AND LOCAL GOVERNMENTS and