These brief tips cover standard mileage reimbursement methods, detail a private letter ruling regarding a broken trust and answer whether bartering is taxable.
Standard mileage rates can lead to inaccurate reimbursements
Many companies use the IRS’s standard mileage rate to reimburse employees for business use of their vehicles on a tax-free basis. The rate — 53.5 cents per mile in 2017 — is calculated annually based on blended and weighted cost factors for different types of vehicles nationwide. The standard rate offers the advantage of simplicity, but because of the way it’s calculated, it tends to underreimburse low-mileage drivers or those who live in high-cost areas and overreimburse high-mileage drivers or those who work in low-cost areas.
If your company employs a significant number of employees who drive regularly for business-related reasons, consider using a more accurate reimbursement method, such as a fixed and variable rate plan or tracking actual vehicle expenses.
Fixing a broken trust
In a taxpayer-friendly private letter ruling (PLR), the IRS allowed a retroactive modification of several trusts to achieve the donor’s tax objectives. The donor’s intent was to establish irrevocable grantor retained annuity trusts (GRATs), but the trust agreements omitted certain language required by IRS regulations and, therefore, failed to qualify for favorable gift tax treatment.
A court granted the donor’s request to retroactively modify the trusts, as permitted by a Uniform Trust Code provision adopted in the donor’s state. The IRS accepted the court’s modification of the trusts for tax purposes, emphasizing language in the trust documents expressly stating the donor’s intent to establish tax-qualified GRATs.
The PLR is good news for donors who wish to correct the terms of a trust in accordance with state law. It also illustrates the advantages of including statements of intent in trust documents.
Is bartering taxable?
It’s not unusual for small businesses — especially start-ups that are short on capital — to exchange goods or services instead of cash. For example, a small brewery might ask the graphic designer across the street to design its logo in exchange for several cases of beer. Contrary to popular belief, these bartering transactions are taxable. In this case, the graphic design company would be required to include the fair market value of the beer in its gross income.
Although this sort of informal transaction may fly under the IRS’s radar, businesses involved in bartering may be required to file Form 1099-MISC. The penalties for failure to file can be harsh. Also, if you use a barter exchange to broker trades with other businesses, the exchange is required to report the proceeds on Form 1099-B.