Fringe benefits are usually a good thing—but there’s a catch when you own more than 2 percent of an S corporation.

The good news? Federal tax law allows the cost of these fringes as deductible expenses for your S corporation.1

The bad news? You, the shareholder-employee who owns more than 2 percent, may suffer additional taxes on some of the benefits because the tax code requires your corporation to put selected benefits on your W-2 (sometimes favorable, sometimes not).2

Here’s the ugly rule that causes this problem. Under the federal income and employment tax rules for the most popular fringe benefits, tax law treats the more than 2 percent shareholder-employee of an S corporation as a partner.3

And—we know you are just waiting for this—more bad news: related-party stock attribution rules apply to the S corporation.

Under these rules, tax law says that your spouse, parents, children, and grandchildren own the same stock you own—and if you employ them in your S corporation, their fringe benefits suffer the same ugly fate as your fringe benefits.4

In this article, we are going to explain the following:

Four fringe benefits that are (a) deductible by your S corporation, (b) taxable to you as a shareholder who owns more than 2 percent, and then (c) deductible by you on your personal tax return. You can see that navigating this maze is a little crazy, and you have to do it right to make it work—which, of course, we explain how to do.

Six stinky fringe benefits. These benefits are stinky because, first, you get nothing from them because you are a shareholder-employee who owns more than 2 percent and, worse, you pay extra taxes because the “non-benefit to you” goes on your W-2 subject to FICA.

Three maybe (but maybe not) fringe benefits. This group of S corporation fringe benefits comes with special rules that can disqualify your eligibility for the benefits.

Three no-problem fringe benefits. ... Log in to view full article.