Page 247 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes (xiv) Various Stock Options: Depending on the types, and employee status, the value of
these options may be tax-free, or tax-deferred. Overall goal of these options is to create
opportunity to buy stock at a price lower than its actual worth.
(a) Incentive Stock Options: Employee buys at reduced value, benefit not normally taxable

when exercised, but when stock is sold.
(b) Restricted Stock Option: Given subject to forfeiture rules if employee leaves
prematurely. Not taxable until forfeiture period elapses, then taxed at fair market
value and provides possible capital gains tax savings.
(c) Non-qualifi ed Option: Taxable when exercised.
(xv) Stock Grants: Business grants employee actual stock, not just options. The fair market
value of the stock is taxable to employee. But if stock appreciates this hidden value is tax
deferred, and may be taxable at reduced capital gains rates later on when sold. This can be

a substantial tax benefit to people in high tax brackets.
(xvi) Deferred Compensation Plans: Allows business to defer paying an employee for current
work until a future date. Can be a good tax saving tool in situations where the expectation
exists that the tax bracket for the recipient will be lower at the future date vs. the current
date and/or vice versa for the business paying it. This is primarily a tax-deferring benefi t,
and the business takes the deduction for the paid compensation at the future date as well.
(xvii) Cafeteria Plans: A benefit plan in which the employee has a choice of either receiving cash

or two or more qualifi ed benefits in lieu of cash. The allowable benefits that can be included
in this plan are: disability, accident, health, dental insurance premiums, medical costs not
covered by insurance, dependant care costs, and qualified 401(k) pension plans.

The bulk of the other fringe benefits that may not be allowed for the owners or controllers of the
business entity types are summarised as follows:
(a) Sole Proprietors: Cannot get tax-free status in on-premise facilities, outplacement
assistance, deferred compensation, disability insurance, death benefi ts, achievement
awards, transportation benefits, moving expense, cafeteria plans, interest rate advantaged

loans, stock options, stock grants.
(b) Partner/owners: Cannot get tax-free status in outplacement services, cafeteria plans,
deferred compensation, disability insurance, stock options, stock grants, and interest rate
advantaged loans.
(c) 2% owner/shareholders of Sub Chapter S Corporation: Cannot get full tax-free/tax-deferred
status in disability insurance, and cafeteria plans.
Be advised that these restrictions mostly apply to owners or controllers of these business entities.
They usually do not restrict general employees from the tax-free/tax-deferred status of the

above-mentioned fringe benefits. Fringe benefits can be a very valuable aspect of a business.
Firstly, the potential tax-savings can be substantial. The business may be able to deduct the entire

cost of these benefits, yet the recipients (business owner, employees) may be able to enjoy these

fringes tax-free. Secondly, offering fringe benefits can help to attract better employees, and reduce
employee turnover. This can save a business a considerable amount of money since employee
turnover is so expensive to deal with, and higher quality employees usually translate into higher
business profi ts.
But it may require some advance planning for some of the potential fringe benefits, especially if

there is any possibility of a problem meeting the highly compensated/non-discrimination tests
for certain fringe benefi ts.
Finally, the administration and reporting requirements make some of the fringes a chore to
maintain, while for others it is relatively simple. So an analysis of the risk to rewards in this area

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