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When Increasing An Expense Account Is Better Than A Raise

January 15, 2011

Attention All Business Owners! (and Employees too!)

Increasing business expense reimbursements can have better after-tax consequences for both the employee and the company. A salary increase is, of course, fully taxable to the employee. Furthermore, allowable deductions for personal business expenses that can offset a salary increase have been greatly reduced by tax law changes.

For example, interest on consumer loans such as credit card charges and automobile loans is no longer deductible. Also, only 50% of the cost of business meals is deductible. In addition, the employee deduction for business expenses that are not reimbursed is limited to the amount by which the employee’s total miscellaneous expenses, exceed 2% of Adjusted Gross income.

Expenses reimbursed to an employee which are included in the 2% limitation of Adjusted Gross Income are fully deductible to the company. So, if the employer reimbursed the employee for these expenses, the after-tax cost of these expenses to the company is reduced and the employee is not taxed on the reimbursement. In addition, the company avoids paying employment taxes on increased salaries. Adjusting salary and expense reimbursement levels to minimize after-tax costs can make an increased expenses account better than a salary raise.

Let Gunwel Tax & Bookkeeping help you with your financial needs in your business. Give us a call at 212-979-6830 or stop by for a visit. See you soon! 

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