Talking Tax Reform - Part VII

In Part V of this series, we discussed the pending elimination of the deduction for unreimbursed employment expenses for people who are paid as W-2 employees.  I promised to discuss how the loan-out corporation would work to help some people in this situation.

I have a number of clients who work in the entertainment industry and last year; prior to tax reform passing, that client decided to form a loan-out corporation.  This client earns a good living and decided to take advantage of one provision of the difference between being employed by someone else, and being employed by your own S-corporation.

The business employing this client did not offer a retirement plan.  By forming their own loan-out corporation, this client can put aside much more money for retirement on a pre-tax basis.

Contributions to Traditional Individual Retirement Arrangements (IRA) are limited to $5,500 annually.  That limit is increased to $6,500 for taxpayers over the age of 50.  For employees whose employer offers a retirement plan, those limits rise to $18,000 and $24,000 respectively.

By forming their own loan-out corporation, my client now gets to contribute the higher limit amount to their retirement plan.  They also will get the benefit of being able to continue to deduct their unreimbursed employment expenses, which would have been lost starting this year.

This is a good solution for people with solid incomes, large amounts of unreimbursed expenses and an employer willing to contract with the loan-out corporation rather than continuing the employer/employee relationship.  But what about those people whose employers can't or won't do that?

For some there is another answer and that is changing their status to that of a Statutory Employee.  The fourth of the scenarios where it is allowed for an employee to be treated in this manner is the one worth exploring here.

A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson's principal business activity.

I have a number of clients who could fit into this scenario.  They would still be employees, still paid through payroll and would be issued a W-2 form at year-end.  But they would be allowed to deduct their unreimbursed employment expenses on a Schedule C on their tax return.  They get the benefits of being an employee of payroll, benefits, and so on, but would not lose that itemized deduction for their business expenses.

This won't work for people who sell services.  But it is a viable alternative for a number of people.

And here is that reminder that the Trump Tax Plan is simply a massive giveaway to the wealthy being paid for by the addition of $1.5 trillion to the national debt over the next decade.