Education reimbursement presents tricky tax issues

Question: I am a solo physician employed by my S corporation. My wife is a registered nurse and also works for my S corporation. She went back to school and is working toward her nurse practitioner certification while continuing to work in my practice. Can my practice pay for, then deduct, the cost of her coursework without it being included in her wages? If not, can my wife and I receive a tax deduction personally, assuming we pay for the courses?

Answer: Your situation is common to many medical offices. Employees often pursue degrees while working and hope to receive employer reimbursement because their studies often benefit the practice. If your practice reimburses your wife for her coursework, without income inclusion, then only the income, net of the education expenses, is being passed from your S corporation to your personal income tax return for taxation. This method works nicely for reducing her education costs by using before-tax dollars.

On the other hand, only eligible education expenses can be paid by your practice for your wife without income inclusion. If the education received is pertinent to your wife's responsibilities and duties by improving her skills to perform her job and does not qualify her for a different trade or business, then the practice should pay for the expenses without including the benefit in her wages.

If the education allows your wife to be eligible for a different business or to meet the minimum requirements for qualification in a trade or business, then the cost of the education would have to be added to her reported wages.

The answer to the question of whether the change from a nurse practitioner to a registered nurse rises to the level of a different trade is clearly answered "yes" in the income tax regulations and in the tax courts.

Unfortunately, even if your wife continues her same office duties as a nurse, the additional coursework makes her eligible for a new trade or business and therefore must be included in her wages if paid by your practice. The same rules apply whether your practice pays for the education expenses or she pays for them directly; the expenses are not tax deductible.

Question: How long should our practice keep various accounting records? I have financial statements, canceled checks and tax returns going back many years and need the storage space.

Answer: Generally, records should be kept for three years, seven years or indefinitely, depending on the kind of record.

You might need a large shredder. because most items can be discarded after a relatively short time. Records in the three-year retention period include routine correspondence, employee applications and expired insurance policies and records.

Items such as accounts payable and receivable ledgers, bank statements and reconciliations, most canceled checks, expired contracts and leases, terminated employee records, inventory records, vendor invoices, payroll records and purchase orders can be shredded after seven years.

Items to keep permanently are audit reports, canceled checks for important items, capital stock and bond records, current contracts and leases, corporate articles, bylaws, year-end ledgers and financial statements, property records and retirement plan records. Permanent records also include tax returns, trademark registrations, patents and copyrights, training manuals and union agreements.

Question: I am selling the home we have owned for 25 years. Will I have to pay income taxes on the sale?

Answer: If your gain is more than $500,000, you might owe capital gains tax. Compare the selling price of your home to the original purchase price to determine if you will owe tax. If the difference is $500,000 or less, your work is done -- no taxes are due, and the IRS does not require you to report the sale. If your gain is more than $500,000, there are some things you can do to mitigate the 15% federal tax rate (and state tax if applicable).

First, go through your records for the last 25 years to identify improvements that you made to the home. Improvements include additions such as a new garage, bedroom, porch or deck. It also includes a new roof, swimming pool, fences, heating and air conditioning, and upgraded plumbing and electrical systems. These improvements can be added to your home purchase price for gain calculation purposes.

Don't forget to add special tax assessments for streets, sidewalks and other local improvements to your purchase price.

Finally, reduce the selling price by closing costs, including commissions, legal fees, advertising, fixing-up expenses and transfer taxes. The difference between the adjusted selling price and purchase price is the gain subject to tax.

If you have stock losses, now might be the time to sell those underperforming investments. That might mitigate much of the tax bite, if indeed you have one.