Comments on: Tool/Equipment Plans Meet Potential Problems at Tax Time

By: Dick A

Dick A — Fri, 04 Apr 2008 04:16:36 +0000

Obviously, anyone who has knowledge of employee tax law would know the programs mentioned by the IRS would be illegal. However, I wonder if the following program example might help both the dealer and technician and still follow the spirit of the law.

A dealer can expense a certain amount of equipment each year before tax - Let’s use $20,000 as an example. The dealer purchases the tools and expenses them on the current years income taxes. Now, the dealer allows the technicians to use the tools for a certain period of time and then sells the tools to the technician at a discounted price - The original tool cost less the tax savings. The dealer then pays tax on the recovered amount the tools were sold for.

Now I’m no CPA (just three years of college accounting and 42-years of running a business) but I think within certain parameters, the above example could be made to work and be a benefit to both the dealer and the employee technician.

By: Becky S.

Becky S. — Wed, 26 Mar 2008 18:20:33 +0000

So let me get this straight, the employer withholds $X each week from the employee to put in a “tool savings” account. This money is not taxed with the rest of the employees paycheck, it is removed before taxes are calculated. Then, when the employee is ready to buy his tools, the employer writes the employee a check, without taking taxes out, for the full amount. Is this correct? So, the employee is not paying taxes on his earnings, and the employer is not paying his taxes on this money either. I can see where that is not kosher with the IRS. To my knowlege the only way to have money with held from your check without paying taxes on it is to buy overpriced health insurance, or put it in a 401K. If anyone knows any different, please let me know!!!

By: Gene

Gene — Tue, 25 Mar 2008 21:23:23 +0000

Thanks for the good article, Dana. While we are not involved in this type of activity, I am familiar with other organizations that sponsor this type of plan for their employees. One such firm that participates has an active apprentice-employee plan in which the Employer withholds an employee-authorized percentage of the employee’s wages in a “Tool Savings Account”. The apprentice-employee can then purchase tools (at a company sponsored discounted price) to stock his/hers toolkit.

I have not heard that this program is in violation of the IRS policy. However, I would guess that it is not in violation.

However, Dana, I also feel that the IRS may have a case in the Employer-Employee plan as you outlined.

Gene