Masonry Magazine August 1972 Page. 13
TAXES
By MIRIAM. McD. MILLER
RETIREMENT SAVINGS
The House Ways and Means Committee is considering a proposal (H.R. 12272) to have an income tax deduction of up to $1,500 per year for retirement savings by employees who are not covered by employer-financed plans or who participate in plans with inadequate benefits.
The current limit on deductible contributions to retirement plans by a self-employed individual is now 10% of earned income up to an annual maximum deduction of $2,500. This legislation would cause this limit to be increased to an annual maximum deduction of $7,500 (15% of the first $50,000 of earned income.) Also provided for in the bill are certain minimum standards for vesting of benefits under qualified pension and profit-sharing plans and for participation in such plans.
SELF-EMPLOYMENT TAX
If you are one of those taxpayers who has to pay self-employment taxes you are aware of the fact that it is a very steep tax. One employment arrangement was so worded that it freed a retired consultant from liability for the self-employment tax. An accomplishment worth noting.
A corporation entered into an agreement with one of its top officers. He would be employed full-time until he retired and thereafter until such full-time services were terminated. Then, upon completion of his full-time services, he would be paid $12,000 a year for the next 10 years provided that he did not compete with the corporation and would be available for consultations if needed.
After his retirement the officer received $12,000 from the corporation, rendered no advisory opinions, and did not compete with the corporation. Was he self-employed after retiremeт?
The Tax Court found that this taxpayer was not self-employed after retirement. The main reason for this conclusion was the inclusion in the contract of the agreement not to compete. It was this provision that led the court to conclude that the taxpayer was not engaged in carrying on a trade or business as a consultant because he was not engaged in offering his services as an advisor to others and was specifically prohibited by the agreement from doing that. Barrett v. Commissioner, 58 TC No. 30.
WITHHOLDING ON WAGES
The IRS has restated its position with regard to whether amounts paid pursuant to the Fair Labor Standards Act and the Walsh-Healy Government Contracts Act are subject to withholding and other employment taxes. In compliance with the Fair Labor Standards Act, a company restored to its employees certain amounts of unpaid minimum wages and unpaid overtime compensation. Subsequently, the employees also filed for and were awarded liquidated damages.
The IRS ruled that since the payments of unpaid minimum wages and overtime compensation were "remuneration for employment" it follows that such payments are wages (for the purpose of withholding and other employment taxes). It matters not whether the amounts are paid as a result of a judgment of a court or in accordance with a stipulation or settlement reached by the parties involved.
On the other hand, payments representing liquidated damages are not remuneration for employment. Thus such payments are not "wages" for Federal employment tax purposes including income tax withholding. This latter statement is true even though the employee must include the amounts he receives as liquidated damages in his Federal income tax return.
Should an employer violate the Walsh-Healy Government Contracts Act he must make payments of liquidated damages to the Treasurer of the US to cover unpaid minimum wages or unpaid overtime compensation. These amounts are placed in a special deposit account at the U.S. Treasury for later distribution among the employees concerned.
As with the Fair Labor Standards Act, amounts representing liquidated damages paid to the U.S. Treasury are not "wages" and are not subject to Federal employment taxes and withholding. And, accordingly, should an employer make payments of back pay directly to employees on account of unpaid minimum wages or unpaid overtime compensation these payments are wages for Federal employment tax purposes. Rev. Rul. 72-268.
HEALTH AND SAFETY EXPENDITURES
If an employer has to make substantial expenditures as a result of the Federal Occupational Safety and Health Act of 1970 may he deduct such expenses as a business deduction? Unfortunately the courts have said that the fact that an expenditure is forced does not make it currently deductible if it is otherwise a capital expenditure.
Briefly, if an expenditure for occupational health and safety is a repair it is currently deductible. However, if it creates a new asset (with a life of more than one year) or if it increases the value of or prolongs the useful life of an asset, it is generally considered to be a capital expenditure and is not currently deductible. Where an asset is fitted to a different use it is also considered to be a capital expenditure. One consolation is that in the event that an expense has to be capitalized eventually its cost can be recovered through depreciation.
TRIPS AND CONVENTIONS
The IRS has announced that its agents and auditors have been instructed to scrutinize deductions for business trips and conventions which appear to be vacations in disguise. The IRS has warned that "deductions claimed for trips and conventions where little time is devoted to business activities will be checked carefully by IRS examiners to determine whether the expenses are properly deductible. Upon audit, taxpayers will be required to substantiate the amount of time spent on business activities."