Leaderboard

The "Check Box" expiring after a year is so frustrating. I often wonder why they even have it since, in my experience, most issues come to light after the year is up. It should remain in effect for at least the 3-year SOL period.

Frankly, I would let the employer dictate this one; if they go ahead to report it as wages later should it be forgiven, then again, issue at hand solved, but if not, a complete no-go area. If they do not declare it as income it may create a lot of problems to the client, they may be sacked should they declare it themselves. It is usually safer to stand still and let the employer take the blame or not, whichever way it is.

Seriously, don't guess at this or make assumptions as to how this works. This is a recruiting incentive structured as a loan where it is written off at the end of a designed period if the employee stays with the company. It's an issue that the IRS has challenged because it believes that the "loan" is taxable when given as a compensatory cash advance, and the employer would get the deduction in the year the period ends (in this case, year 3). The complication is exactly how the transaction is set up that will govern when the income is reported. There is case law on this issue also, iirc one of the more recent ones being Morgan Stanley. Here is an older article from The Tax Advisor that discusses the issue and does reference a TAM, but there is more recent case law on this too: https://www.thetaxadviser.com/issues/2011/oct/clinic-story-09.html Here's a blog type article that also describes it and includes some of the advantages and disadvantages of using these employment incentives. https://keepfinancial.com/blog/employee-forgivable-loans-can-be-unforgiving-users-beware The OP should do more research and case law to understand the issue better and not rely on simple, basic answers here as to when it becomes taxable.

It's been almost 25 years since I took my cost accounting class and am looking to see if this makes sense or if I'm missing something. I am using round numbers. A friend started driving for Uber and we discussed whether or not it was financially worth the effort. He is not concerned about his time since he is retired, he enjoys it and it gets him out of the house. He had made about $10,000 and racked up about 7,500 miles. His taxable income would be $5,125 ($10,000 less $4,875 mileage deduction), $3,900 after taxes. This got me thinking: is this the true income? I would argue it is not. The only true variable cost in the mileage rate is gas. He would have to pay for insurance and licensing whether or not he drove for Uber. Repairs and depreciation are a mixed cost, as he would still have to make the repairs and the car would still depreciate even if didn't drive for Uber. I used Kelly Blue book to see what impact the added mileage had on the value of the car, which was $600. He had $500 in repairs (none of which were directly attributable to driving for Uber) and the business usage was about 40%, making the repair costs attributable to business use $200. He gets 25 MPG and gas in this area is $3 a gallon, 12 cents a mile, making his cost for gas $900. Looking at the cash flow, the true cost of driving for Uber is $1,700 ($900 for gas, $200 for repairs, and $600 for depreciation) making his true income $8,300. After taxes, he has about $7,000 more in his pocket driving for Uber.

Thanks to all for taking the time to respond! This was super helpful.

Another important factor is the amount of the "loan". If it is more than say 35% of the employee's average paycheck, if the employee walks before the 3-year period, the employer may not be able to recapture via payroll and would be wanting to make it wages - at least for "punishment" purposes. (A daily issue on payroll chat groups, how to recoup advances, sign on, moving, etc.) If the OP is from the perspective of a preparer handling a question from a client (the employee), I would not (as preparer) step in the steaming pile. Let the employer handle it, correctly or incorrectly, and go from there. The employee reporting it as wages, when the employer has not, could result in the end of the employment. If the employee wants to work for someone who may be shady, so be it. The main issue is it is taxable period. Trying to make it not is a problem, as it trying to tax shift (if the forgiveness is a wink and nod deal instead of documented).

Here's another good one: https://www.alvarezandmarsal.com/insights/warning-employee-loans-could-have-adverse-tax-consequences#:~:text=In Technical Advice Memorandum (TAM,the loan%2C for tax purposes.

Actually the big problem here is that you and your client will have to respond to what his employer does or doesn't do. As both Tom and Dennis have pointed out, the proceeds are more than likely W-2 wages which would be the IRS position in this situation. Will his employer at some point issue a W-2 or a 1099 or even issue anything is the big question?

WE all know that the IRS has been woefully underfunded until recently. This isn't to disparage mcb39 and GR2's comments, but you've got to give them time to hire and train people.