Welders Typical Expenses

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Welders and Welding Shops

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Question or Topic

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The Question:

Objectives

Excel Spreadsheet for Typical Expenses	Accountable Plans	Cash Method - Who Can Use It?
Welders and Welding Shops Expenses	Accountable Plan Emp Manual	Accounting Methods Introduction
Accountable plan	Accounting - Cash Method

	The Answer

Welders and welding shops have many unique expenditures that no other business or occupation incurs.

Pickup trucks: A pickup truck with a loaded gross vehicle weight of 14,000 pounds or less is a qualified nonpersonal use vehicle if it has been specially modified so it is not likely to be used more than minimally for personal purposes. For example, a pickup truck qualifies if it is clearly marked with permanently affixed decals, special painting, or other advertising associated with your trade, business, or function and meets either of the following requirements.

It is equipped with at least one of the following items.
1. A hydraulic lift gate.
2. Permanent tanks or drums.
3. Permanent side boards or panels that materially raise the level of the sides of the truck bed.
4. Other heavy equipment (such as an electric generator, welder, boom, or crane used to tow automobiles and other vehicles).
It is used primarily to transport a particular type of load (other than over the public highways) in a construction, manufacturing, processing, farming, mining, drilling, timbering, or other similar operation for which it was specially designed or significantly modified.

You should also read the article about vehicles that are not subject to the depreciation limitation:

cars and trucks excluded from depreciation limits

In General Items That Cannot Be Deducted Fully The Year Of Purchase

Capital Expenses A capital expense is a payment, or a debt incurred, for the acquisition, improvement, or restoration of an asset that is expected to last more than one year.

Although the welder or welding shop purchases expensive equipment and pays for the entire purchase price in one year, the IRS requires some purchases to be deducted over a period of several years. Therefore, the welder must spend the money on the equipment and pay the taxes on the earnings. There is one benefit the welder can find - that of the additional first year write-off. You will find the following article helpful with this Tax Killer - Depreciation and Section 179.

You will also want to learn about depreciable property in general - Depreciable Property.

The welder or welding shop may at some time want to consider incorporating his or her business. The following articles will be helpful:

S Corporation - What It Is About

S Corp and LLC Compared

S Corporation an Introduction

or the above in PowerPoint: S Corporation an Introduction

Qualifications of the S Corp - a partial listing (Requires MS Word)

The qualified non-personal use vehicles are enumerated within the tax code and regulations the following is a list of those criteria:

Qualified nonpersonal-use vehicles

All of an employee's use of a qualified nonpersonal-use vehicle is a working condition benefit. A qualified nonpersonal-use vehicle is any vehicle the employee is not likely to use more than minimally for personal purposes because of its design. Qualified nonpersonal-use vehicles generally include all of the following vehicles.

Clearly marked police and fire vehicles.
Unmarked vehicles used by law enforcement officers if the use is officially authorized.
An ambulance or hearse used for its specific purpose.
Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds.
Delivery trucks with seating for the driver only, or the driver plus a folding jump seat.
A passenger bus with a capacity of at least 20 passengers used for its specific purpose.
School buses.
Tractors and other special purpose farm vehicles.

The welder will destroy clothing used while on the job. The IRS has a provision that fails to recognize the circumstance where the earning of the income destroys the clothing and is a cost greater than normal and the deterioration of the clothing is much more rapid than normal.

First the IRS position must be communicated-

"The costs of buying and maintaining blue work clothes worn by a welder at the request of a foreman are not deductible."

Second one must argue for the welder regarding this matter. If the clothing is needed to protect the worker, then it is a matter of safety and if the clothing is destroyed at an abnormally rapid rate then the welder should seriously consider taking the tax deduction. However, the welder must be aware the IRS has the authority to challenge the deduction.

Protective Clothing

You can deduct the cost of protective clothing required in your work, such as safety shoes or boots, safety glasses, hard hats, and work gloves.

Examples of workers who may be required to wear safety items are: carpenters, cement workers, chemical workers, electricians, fishing boat crew members, machinists, oil field workers, pipe fitters, steamfitters, and truck drivers.

Work Clothes and Uniforms - quoted from the IRS publications

"You can deduct the cost and upkeep of work clothes if the following two requirements are met.

You must wear them as a condition of your employment.
The clothes are not suitable for everyday wear.

It is not enough that you wear distinctive clothing. The clothing must be specifically required by your employer. Nor is it enough that you do not, in fact, wear your work clothes away from work. The clothing must not be suitable for taking the place of your regular clothing.

Examples of workers who may be able to deduct the cost and upkeep of work clothes are: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc.)."

The welder has now some ammunition in the arsenal:

Clothing not suitable for everyday wear might be deductible
Protective clothing is deductible
Safety equipment is deductible
The clothing is a necessary and ordinary part of the requirements for producing the income

Therefore - we will advise the deduction of the clothing as long as the welder fully understands all the implications of an IRS challenge.

Fuel For the Welders

Off-Highway Business Use

A credit or refund may be allowed for the excise tax on fuel used for an off-highway business use.

Off-highway business use is any use of fuel in a trade or business or in an income-producing activity other than as a fuel in a highway vehicle registered or required to be registered for use on public highways. The terms "registered" and "public highway" are defined later. Do not consider any use in a boat as an off-highway business use.

Off-highway business use includes fuels used in any of the following ways.

In stationary machines such as generators, compressors, power saws, and similar equipment.
For cleaning purposes.
In forklift trucks, bulldozers, and earthmovers.

Generally, this use does not include nonbusiness use of fuel, such as use by minibikes, snowmobiles, power lawn mowers, chain saws, and other yard equipment.

Example: Joanna owns a landscaping business. She uses power lawn mowers and chain saws in her business. The gasoline used in the power lawn mowers and chain saws qualifies as fuel used in an off-highway business use. The gasoline used in her personal lawn mower at home does not qualify.

Fuel For the Welder(s)

This means the welder or welding shop may have a credit for fuel used in the welding machines.

The amount of the credit is based upon the number of gallons used in the welding machines. Therefore, the credit resulting from the computation may not be large enough to warrant your time to account for the gallons placed into the welding machines. You might want to make an estimate of the gallons and then contact Bob Parrish CPA to make the credit computation for you.

Educational Expenses

The welder may need to be ASME Certified. In the cases that courses are required, the costs of the education are deductible as long as it does not qualify the welder for a new occupation.

MAINTAINING OR IMPROVING SKILLS

In general, education that maintains or improves skills required by an individual in her employment or other trade or business is deductible. This includes refresher courses and courses dealing with current developments, as well as academic or vocational courses that are required in the individual's employment or trade or business.

Rig Rents or Truck Rents

Many years in the past there was a common practice of naming payments to contract welders as rig rent or truck rent for a portion of the payments to the welder. The IRS, in the past, argued many of not all of those payments were in fact for services of one form or another and successfully challenged any or all treatments labeling payments to the welders as rent or reimbursement of expenses. The technical discussion is reserved for another set of articles with only commentary included herein. (Welder - Emp or Ind Contractor?)

The Tax Code and the Tax Regulations for Income tax purposes tax both services and rents in the same manner under today's laws. Personal Services have an additional tax burden - the Payroll Tax (Social Security and Medicare). The Federal Unemployment tax and the State Unemployment tax are not discussed in this article --- However both taxes apply to Services Performed.

The long standing doctrine of charging the payroll taxes on services has historically been applied to charges for the use of personal property when the facts and circumstances show services are provided by the owner of the personal property for the person or entity renting/using the property.

Rig & Truck Rents: "For Example"

The welder, of course, is responsible for all the ordinary responsibilities of ownership - taxes, insurance, etc.

However, in addition the welder maintains the equipment or vehicles - lubrication, oil changes, washing, and other services that are ordinary and necessary activities to keep the items working, available and in place for the person or entity using the equipment. These significant personal services fall in the tax rules that require the provider of the services and equipment to compute the payroll taxes (FICA and Medicare) on the amount of the "rents".

IRS Position and Challenge

IRS Again Rules that Renting Employees' Tools May Create Payroll Tax Liability
(1999)

In the past it has been common for employees such as mechanics, loggers, welders, and construction workers to provide their own tools or equipment. Similarly, truck drivers and couriers may provide their own vehicles when performing their work. Part of the payment made to these employees may be to compensate them for using their equipment (i.e., the employer is renting the equipment the employee is using). In the past - If properly structured, these rental payments could have provided the employer and employee with important tax benefits. Both sides saved payroll taxes while the employee often saved income taxes as well (because out-of-pocket employee (the independent contractor welder was able to take the ordinary and necessary business expenses in full) business expenses normally did not produce much tax savings).

In a pair of IRS legal memorandums (ILMs) released early in 1999, the IRS discussed when rental payments are treated as taxable wages or excludable business expense reimbursements. The answer depends on whether the payments are made under an accountable plan. If so, the payments can be excluded from taxable wages. Conversely, payments under a nonaccountable plan are included in the employee’s gross income, are reported on Form W-2, and are subject to income tax withholding and payroll taxes [Reg. 1.62-2(c)(5)]. For the independent contractor there is currently no benefit to renting personal property when services are rendered with the property -

For a reimbursement arrangement to be treated as an accountable plan, it must require that reimbursed expenses:

have a business connection,
be substantiated, and
be returned by the employee to the extent the amount paid exceeds the substantiated amount [Reg. 1.62-2(c)(2)].

A plan or arrangement that doesn’t meet one or more of these requirements is a nonaccountable plan. Unfortunately, the two ILMs (199917011 and 199921003) don’t provide definitive guidance on what a properly structured accountable plan for employee rental payments looks like. Instead, the ILMs cite a couple of cases and a ruling that show what doesn’t qualify as an accountable plan.

For example, according to the IRS, employers have long relied on Rev. Rul. 68-624 as authority for designating a portion of an employee’s compensation as a rental payment and excluding that amount from wages. In that ruling, the taxpayer employed truck drivers who furnished their own trucks to haul stone. The taxpayer paid a fix amount per load and allocated one third to wages and two thirds to payment for use of the truck. The ruling concludes that the proper allocation of the payments depends on the facts of the situation (e.g., the prevailing wage scale for drivers and the fair rental value of trucks similar to the ones the drivers furnished). But as the IRS points out, Rev. Rul. 68-624 is out of date because it doesn’t consider whether the payments are made under an accountable plan, which is required under current law.

And now in a recently released field service advice (FSA 199940002), the IRS reiterated its opinion that rental payments under an accountable plan are not wages for employment tax purposes. To determine whether the payments are made under an accountable plan, examiners must look at each case’s facts and circumstances. If the arrangement between the employer and the employee meets the requirements previously listed, all payments under the arrangement will be treated as made under an accountable plan. If not, the payments are additional wages subject to income tax withholding and payroll taxes.

The ILMs and the field service advice were all prepared by Jerry Holmes, the IRS Branch 2 Chief, Employee Benefits and Exempt Organizations Division. In the ILMs he concludes that to determine whether a tool or equipment rental arrangement is an accountable plan, the examiner must understand the details of the arrangement (i.e., it’s a factual decision). However, its promising to note that he warns examiners they cannot assume that every rental arrangement is a disguised payment of wages or that an employer cannot establish a plan meeting the accountable plan requirements.

The following are some of the questions Mr. Holmes says examiners must answer before concluding that a rental arrangement with employees is an accountable plan:

When did the arrangement begin? Was it before or after the Family Support Act of 1988 and the Tax Reform Act of 1986, which sharpened the distinction between accountable and nonaccountable plans and the tax treatment of reimbursed and unreimbursed employee business expenses? (Presumably, it’s good if the arrangement preceded these two bills.)
Why did the employer decide to pay rent to the employee (i.e., was there another business reason besides payroll tax savings)?
Is the reimbursement arrangement in writing and are the terms followed? (For example, if the agreement specifies that employees must let other employees use the tools that the employer is renting, that’s probably good. But if employees never do this, the provision is meaningless window dressing.)
Does the rental arrangement reflect an arm’s length transaction and does it specify the employer’s basis for allocating amounts between wages and rentals?
If a lease exists, does it have a specific term, and what happens if the employee terminates employment before the end of the term? (The arrangement not automatically terminating tends to support the legitimacy of the rental agreement.)

Given the IRS’s heightened attention to employee rental arrangements, care must be taken to document that the employer has a reasonable basis for determining the amount of the rental payments. In addition, the employer must be able to show why the arrangement is not merely a recharacterization of wages (i.e., employers need a business purpose for switching from straight compensation to compensation plus expense reimbursement or rental payments). One possible way of doing this is that with the hot job market, employers must do all they can to attract good employees, which may mean providing expense reimbursements or rental payments under an accountable plan rather then expecting employees to pay their own expenses out of pocket.

	Solutions

Solutions are dependent upon facts & circumstances, law and the objectives. These elements vary from one time to another, from one circumstance to another and from person or entity to another.

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