🔰 Asking a Tax Accountant: What are Economic Benefits for Officers, etc.?

Even if you haven't paid in cash, tax law may say, "That's salary."

【Characters】
Mika: Someone for whom the line between company money and the president's personal money sometimes looks blurry.
Professor: A tax accountant. The person in charge of drawing white lines between wallets.

【Salary is not limited to cash】

Mika: Professor, please teach me about "economic benefits for officers, etc." today. When you say officer salary, you mean the monthly officer remuneration, right?

Professor: Of course, that is the basis. However, in the world of tax law, salary is not just cash.Even if the company has not given cash to an officer, if they have effectively allowed them to profit, it may be viewed as "salary."

Mika: So there is salary other than cash?

Professor: There is. For example, the company sold assets to an officer cheaply, rented a company house cheaply, lent money interest-free, or the company paid for personal expenses. In these cases, the officer is benefiting economically. This is called an "economic benefit."

Mika: In other words, even if it's not in a pay envelope, if you are receiving benefits from the company, it can be treated as salary.

Professor: That's right.Tax law looks not only inside the pay envelope but also at the exits of the company's wallet.

【What is an economic benefit? It is when an officer effectively profits】

Mika: The term economic benefit is difficult, but what is it in short?

Professor: Simply put, it is when an officer or similar person receives the same effect as having effectively received a salary due to the company's actions.

Mika: For example?

Professor: If a company gives equipment with a market value of 1 million yen to the president for free, the president has profited by 1 million yen. This is an economic benefit. Also, if you sell an asset with a market value of 1 million yen to the president for 100,000 yen, the 900,000 yen difference becomes an economic benefit.

Mika: It's not a bargain, it's salary.

Professor: That's right."Specially cheap" or "specially expensive" transactions between a company and an officer are prone to becoming salary issues in tax matters.

Mika: Tax law wakes up when it sees special prices, doesn't it?

Professor: Yes. Especially if the other party is an officer, tax law wakes up even without coffee.

【Example 1: When company assets are sold cheaply to an officer】

Mika: Please give me a concrete example.

Professor: Let's consider a case where a company sells a car it owns to the president. Suppose the market value as a used car is 3 million yen, but it is sold to the president for 500,000 yen.

Mika: That's quite a bargain for the president.

Professor: It's too much of a bargain. In this case, the 2.5 million yen difference between the 3 million yen market value and the 500,000 yen transfer price may be viewed as an economic benefit to the president.

Mika: In other words, the company gave the president 2.5 million yen worth of profit.

Professor: That is correct. **Even if 2.5 million yen was not handed over in cash, it has an economically similar effect.** When selling company cars or equipment to officers, it is important to keep market value documentation, appraisal reports, and the reason for the sale.

Mika: 'Family pricing' is 'cold sweat pricing' in tax terms.

Professor: 'Compassionate pricing' is brought back to room temperature during a tax audit.

[Example 2: Buying assets from an officer at a high price]

Mika: Conversely, what if the company buys something from an officer at a high price?

Professor: This is also something to be careful about. For example, suppose the market value of equipment owned by the president personally is 300,000 yen, but the company buys it for 1 million yen.

Mika: The 700,000 yen difference means the president is profiting.

Professor: That is correct.If a company buys from an officer at a price higher than the market value, the difference may be considered an economic benefit to the officer.

Mika: Whether selling too cheaply or buying too expensively, both are dangerous.

Professor: Yes. In transactions between a company and its officers, 'price distortion' becomes an issue. Tax law is indifferent to both discounts and markups.

[Example 3: Renting company housing at a low price]

Mika: What about company housing? It's common for companies to rent housing to officers, right?

Professor: Officer housing is an effective system if designed properly. However, if a certain amount of rent is not received from the officer, it may be taxed as salary.

Mika: Letting them live there for free is an economic benefit, then.

Professor: That's right. **If company housing is provided to an officer free of charge, the equivalent rental value is taxed as salary.** Also, if the rent received from the officer is lower than the equivalent rental value, the difference is taxed as salary.

Mika: For example, if the equivalent rental value is 100,000 yen per month, but only 20,000 yen is received from the president, the 80,000 yen difference becomes an economic benefit.

Professor: That is the idea. You need to be especially careful with luxury company housing. For luxury residences that cannot be recognized as standard company housing, they may be judged based on the amount equivalent to the rent that should normally be paid.

Mika: So, cases that are more like a hotel exclusively for the president than company housing.

Professor: In that case, tax law arrives before room service.

[Example 4: When a company lends money to an officer interest-free]

Mika: Do officer loans also become an issue?

Professor: They become an issue very often. The fact that a company lends money to an officer is not immediately bad in itself. However, if it is lent interest-free or at a low interest rate, the difference from the interest that should normally be charged may be taxed as salary.

Mika: If a company lends 10 million yen to the president interest-free, the president is profiting by the amount of interest that should have been charged.

Professor: That is correct.Company money is not an extension of the president's wallet. The company and the president are separate legal entities.

Mika: In small and medium-sized enterprises, that is where the line is most likely to blur.

Professor: That is true. Once you start thinking of the company's bankbook as a 'larger personal wallet,' the tax fog becomes thick.

[Example 5: When a company covers an officer's personal expenses]

Mika: Is the company covering personal expenses also an economic benefit?

Professor: Yes. For example, when the company covers the president's personal travel expenses, private dining expenses for family, membership fees for personal hobbies, or shopping unrelated to business.

Mika: That is the story of paying with the company card, right?

Professor: It happens often. However, a company credit card is not a magic card.Even if the card is in the company's name, if the content of the expenditure is for private use, it may be viewed as an economic benefit to the officer.

Mika: What if it says 'meeting expenses' on the receipt, but it was actually a family trip?

Professor: Tax law may want to look as far as the room assignments at the inn.

Mika: I suddenly became scared.

Professor: Rather than being scared, separate them from the beginning.Not mixing company money and personal money is the strongest countermeasure.

[Example 6: Even under the name of secret funds or entertainment expenses, be careful if business use is unclear]

Mika: What about expenses paid as "secret funds" or "entertainment expenses"?

Professor: Among items paid to officers under names like secret funds, those for which it is not clear that they were used for corporate business may be considered economic benefits.

Mika: Writing it as "secret funds" makes it seem like I don't have to explain it, somehow.

Professor: That is where it gets dangerous. Even if the name is secret funds, if you cannot explain that it was used for business, there is a possibility it will be seen simply as handing money to an officer.

Mika: So, saying "it's a secret, so I can't say anything" doesn't work, right?

Professor: It does not. Tax law does not view silence as romantic. It generally treats it as a question.

[Example 7: Entrance fees and membership dues for officers' social organizations]

Mika: What about entrance fees and membership dues for social organizations?

Professor: If a company pays for entrance fees or membership dues for a social organization that an officer should bear as an individual, that amount may be considered an economic benefit to the officer.

Mika: For example, things like golf clubs or membership-based clubs?

Professor: The judgment changes depending on whether it is necessary for business and used for company operations, or if it is for the officer's personal hobbies or status.

Mika: Sometimes a president will say, "This is for networking."

Professor: That happens. However, the term "networking" is convenient, but the more convenient a term is, the more explanatory documentation is required in tax matters.

Mika: If saying "it's for networking" made everything pass, the world of receipts would be a paradise.

Professor: The tax office enters paradise, too.

[Example 8: Company bears life insurance premiums where the officer is the insured and beneficiary]

Mika: Can life insurance premiums also become economic benefits?

Professor: They can. If a company bears all or part of the insurance premiums for a life insurance contract where an officer, etc., is the insured and the insurance beneficiary, that amount paid may be considered an economic benefit to the officer.

Mika: That's the case where the company is paying, but the individual officer receives the benefits of the insurance, right?

Professor: That is correct. For life insurance, you cannot determine the tax treatment without confirming the relationship between the policyholder, the insured, and the insurance beneficiary.

Mika: In insurance, the relationship chart of the characters is more important than in a drama.

Professor: And if you get the correlation chart wrong, the taxes change.

[In corporate tax, the issue is whether it can be treated as a deductible expense]

Mika: I understand that if an officer gains a benefit, it is taxed as the officer's own salary. What happens on the company side?

Professor: On the company side, the issue is whether that economic benefit can be included in deductible expenses.

Mika: You mean whether it becomes a company expense, right?

Professor: Yes.Economic benefits provided continuously to an officer, where the amount of the benefit is roughly constant each month, may be deductible as fixed-amount periodic compensation.

Mika: For example, the difference in company housing rent that is a fixed amount every month.

Professor: That's right. On the other hand, things like temporarily giving assets to an officer, forgiving a debt, or having the company pay for personal expenses do not qualify as fixed-amount periodic compensation and may not be deductible.

Mika: So, you let the officer gain a benefit, and it doesn't even become a company expense.

Professor: Exactly.Economic benefits can simultaneously bring up three issues: the officer's personal income tax, the company's deductible expenses, and withholding tax.

[Hiding or disguising it makes things even stricter]

Mika: The National Tax Agency's explanations also use terms like 'concealment' and 'disguise,' don't they?

Professor: Yes. If a corporation provides an economic benefit to an officer by concealing facts or disguising accounting entries, that amount will not be included in deductible expenses.

Mika: For example, when a president's personal expenses are processed as fictitious outsourcing costs or meeting expenses.

Professor: That's right.Accounting that hides facts or makes them look like something else is viewed more severely than a simple judgment error.

Mika: It's like a disguise for expenses.

Professor: A disguise might get applause on stage, but it is not welcomed during a tax audit. In fact, it will bring the spotlight on you.

[In the case of an officer who also serves as an employee]

Mika: What about an officer who also serves as an employee? That's someone who is an officer but also does work as a regular employee, right?

Professor: If the amount of economic benefit provided by a corporation to an employee who also serves as an officer is at a level provided to other employees, it may be deductible as an expense related to their duties as an employee.

Mika: If it's a welfare benefit provided to regular employees in the same way, it's not immediately disqualified just because they are an officer.

Professor: That is correct.It is important that welfare benefits are a 'system for everyone.' Welfare benefits only for the president are closer to officer compensation than welfare.

Mika: Welfare benefits exclusively for the president. It sounds impressive, but it's unsettling from a tax perspective.

Professor: It is quite unsettling.

[Practical points the president should keep in mind]

Mika: What should the president be careful about?

Professor: First, be aware of market value in transactions between the company and the individual. Selling company assets to an officer, the company buying from an officer, or the company lending to an officer. In such transactions, it is necessary to confirm the market value or standard terms.

Mika: The closer the relationship, the more you should check external prices.

Professor: Exactly. Next, for company housing and loans, ensure that internal regulations, contracts, and calculation bases are in order. For company housing, clarify the rent equivalent; for loans, clarify the interest rate, repayment period, and approval procedures.

Mika: Don't just make verbal promises; put them into documents.

Professor: Yes. **In tax audits, documents are stronger than memory.** Memory can get sick, but documents remain if they are preserved.

Mika: What is the third point?

Professor: Do not pay personal expenses with a company card or company account. If you have to pay them unavoidably, clarify the processing, such as having the officer reimburse the company immediately.

Mika: Don't mix company money and personal money.

Professor: This is the most important thing.Most tax issues become difficult because things are mixed together.

[Summary]

Economic benefits for officers, etc., refer to providing substantial benefits to officers or specially related employees, even if the company is not paying cash directly.

Typical examples include transferring company assets for free, selling them below market value, buying from an officer at a high price, waiving claims, lending company housing for free or at a low cost, lending money interest-free or at a low interest rate, the company bearing personal expenses, or the company paying for social club membership fees or life insurance premiums.

**Economic benefits that are provided continuously to an officer and are generally a fixed amount each month may be deductible as periodic fixed compensation.** However, temporary provision of benefits or those where the amount is not fixed do not qualify as periodic fixed compensation and may not be deductible.

Furthermore, items that are unreasonably expensive or those accounted for through concealment or misrepresentation are not permitted as tax-deductible expenses.

Mika: In other words, officer compensation includes not only cash but also cases where the company provides a benefit to an officer.

Professor: That is correct.Even if the benefits a president receives from the company are not in an envelope, they may be viewed as salary under tax law.

Mika: Buying a company car cheaply, living in company housing at a low cost, borrowing money from the company interest-free, or having the company pay for personal expenses. All of these are benefits gained from the company.

Professor: Exactly. And if those benefits are considered salary, it creates issues regarding income tax for the officer, and issues regarding tax-deductible expenses and withholding tax for the company.

Mika: In a nutshell, what is the bottom line?

Professor: If an officer gains a benefit using company money, you should pause and ask, "Isn't this salary?" Tax law does not just look at cash; it looks at the fact that a benefit was received.

Mika: So, tax law looks at the face of the person who gained the benefit, not the pay envelope.

Professor: Well said. However, when the president's smile is too bright, make sure the accounting treatment doesn't become dark.