Employee loans are generally subject to special scrutiny in an IRS examination. In addition to the issue of sufficient interest for Sec. 7872 purposes, controversy often ensues over whether the loan is bona fide debt or merely an advance payment of compensation.
According to the Service, a loan scheduled to be forgiven over a particular period as long as the employee remains employed by the lender is an advance payment of compensation, not bona fide debt; see, e.g., Beaver, 55 TC 85 (1970). Many employers try to avoid this issue by not scheduling a cancellation of debt based on an individual's continued employment; instead, employers will agree to a guaranteed cash bonus arrangement that provides an employee with money to pay the loan.
However, in Letter Ruling (TAM) 200040004, the IRS ruled that a cash loan/bonus arrangement still resulted in immediate income to the employee for the amount of the purported loan. In addition, the employer was not allowed a compensation deduction until the employee actually provided services.
An employer made a cash payment to an employee and entered into two separate contracts with him. The first contract was a promissory note agreement and the second contract was a bonus agreement. The note contract provided that the cash payment was proceeds on a promissory note. The note required repayment in five annual payments with interest. The employer would forgive the note on the employee's death, disability or termination without cause. Otherwise, the note was unconditionally payable by the employee. The employee granted the employer a security interest in his company common stock. The employer was authorized to offset other payments due the employee https://www.suntrust.com/loans for amounts due and unpaid on the note.
The second contract (the bonus agreement) guaranteed that the employer would pay the employee five annual fixed bonus payments. The bonus payments corresponded in amount and timing to the required note payments. The bonus agreement provided that all bonus payments would be retained by the employer as an offset to (and in payment of) the promissory note. The employee did not have any rights to the guaranteed bonus payments, because the payments would automatically apply to the note balance. Thus, in effect, the employee would neither make future note payments nor receive bonus payments in cash, as both would simply offset each other.
Loans to Employees Were Not Bona Fide Debt
For the Service to find immediate taxable income, the cash received by the employee could not be a loan. A loan, of course, is not considered income; see James, 366 US 213 (1961). If an arrangement does not constitute a bona fide loan, the cash is considered compensation income when received.
In determining whether or not the arrangement was a loan, the IRS admitted that the loan appeared to be bona fide in form, based on factors indicative of debt:
1. The employee's signature on a promissory note;
2. The employee is required to make cash payments;
3. The employee is charged interest; and
4. The employee's pledge of stock as security for the loan.
However, the Service viewed the purported loan as not "an unconditional and personal liability on the part of the `debtors.'" Because the loan payments would be made with guaranteed bonus payments, which corresponded with the loan payments in both amount and timing, the IRS concluded that the loan, in effect, would be paid back with the employee's future services.
The Service distinguished this arrangement from a similar one in Gales, TC Memo 1999-27. In Gales, a commissioned insurance agent obtained advances (i.e., loans) from his employer. The advances accrued interest and were paid directly back with future commissions earned by the agent. The Tax Court held that, because the employee earned commission income, there was uncertainty about whether future compensation would be sufficient to cover the loan payments. Therefore, the Tax Court ruled that the advances were not taxable income in the year received.
In the TAM, the bonus payments were fixed and corresponded with the loan payments in timing and amount; the loan payments were effectively guaranteed as long as the employee provided the services required under the employment contract. Therefore, there was no unconditional promise to repay the loans in cash. The IRS dismissed the fact that the employee could terminate employment before five years and had to repay the loan without benefit of the bonus payments, as that situation would, in effect, also exist if the arrangement was a loan with scheduled forgiveness and an employee left his employment. In both situations, there was no actual monetary liability unless the employee quit before the scheduled repayments or bonuses.
The Service cited Beaver for the proposition that a bona fide loan requires the borrower to make monetary payments to satisfy the loan. Under this arrangement, the loan and bonus payments corresponded in amount and timing such that both offset each other. However, according to the TAM, even if the bonus and loan payments are actual separate payments, the circular flow of checks was a meaningless gesture. Under the arrangement, no real future payments would be made; the guaranteed bonus payments completely offset the required loan payments, and bonus payments would not actually be made to the employee but remain with the employer as an offset on the loan. Therefore, the IRS concluded, the loan proceeds were a payment for future services.
In the TAM, the bonus payments were not income to the employee. Because the employee would never be entitled to them, as they were merely offsets to the loan payments, he did not have "dominion and control" over any bonus payments. Thus, the Service disregarded the bonus payments as income; instead, it found the loan proceeds to be a cash advance to the employee.
Finally, if the employee terminated employment before the five-year period, the loan payments would be fees paid for termination of an employment contract. In the year a "termination fee" is paid, an employee may claim the payment as a right deduction under Sec. 1341. The IRS could argue, however, that the payment is an unreimbursed employee business expense subject to the miscellaneous itemized deduction 2%-of-adjusted-gross-income floor.
Timing of the Employer's Compensation Deduction
On the employer side, the IRS concluded that the employer's corresponding compensation deduction was not allowed until the employee performed the services. Because the arrangement involved cash compensation to the employee, the matching of income and deduction under Sec. 83 did not apply. Instead, the deductibility of the arrangement was determined under the all-events and economic-performance tests of Sec. 461 and the regulations thereunder. Under Regs. Sec. 1.461-1 (a)(2), the all-events test is satisfied when an arrangement is made, because the liability for payment of bonuses is established in fact and amount at that time. But the economic performance rules of Sec. 461(h)(2)(A)(i) provide that a deduction for performance of services occurs as the services are provided. Therefore, unless both the all-events and economic-performance tests are satisfied, the employer cannot deduct the advance compensation when paid.
FROM GARY T. WEAVER, CPA, AND ED SAIR, J.D., MLT, CPA, WASHINGTON, DC
Dairy automation is already revolutionising the dairy industry. The reasons for this are revealed in this article.
It is easy to think that milk comes from cows and eventually reaches us on the supermarket shelves. It's true of course, but this is a very over simplified view of how the process works.
In truth we might all run out of milk very quickly if the dairy industry did not rely on dairy automation to help them make the whole process as efficient as possible. It's not just a question of getting the milk into the shops as quickly as possible; it's also a question of ensuring that other products can be made easier and more quickly.
In this situation factory automation can totally overhaul a business and make it a thousand times more efficient. Can you imagine a business where all the yogurts and cheeses were made by hand? It's true that some businesses do exist like this, but they tend to be localised and dedicated to producing local produce. This is their unique selling point and they don't tend as a rule to sell all over the world or even over a large geographical area in the same country.
But bigger businesses need dairy automation to make their businesses viable. The huge number of units passing through their factories each and every day means that they have to be efficient and able to handle that amount of produce. They will still need employees of course, but they also have to ensure that they can meet demand - and this is largely only possible with dairy automation.
Automation of this kind comes in many forms. It's not just a case of getting the milk from the cow: many different processes and stages are required to produce various different products. The more each stage can be automated, the more efficient the business becomes. This can also lead to it being able to offer more cost effective prices in order to challenge its competition.
As such, factory automation has totally transformed the dairy business. It has enabled it to survive and thrive in the modern day world we live in. The many products that are dairy based can be created more easily and quickly than ever before. With experienced workers watching over every stage of the process in each case, it leads to a more efficient outcome and enables businesses to be more competitive.
No stage of the process is overlooked either. From getting the milk to processing it and getting it into the bottles or cartons, everything can be automated. The same applies for other kinds of dairy products too, giving you plenty to think about in the process. The next time you buy a carton of yogurt you may wonder how many automated processes were involved to bring it to you fresh and enticing and ready to eat.
As you can see, factory automation in the dairy industry is going strong and producing excellent results too.
That research, which should be done by someone with internet expertise, can find a problem that is keeping a search engine's web crawler from fully exploring your site. There are consultants who specialize in finding and fixing these problems. It is important to remember that while search engines do offer SEO guidelines, they don't list all of the factors they consider in their rankings. Google alone said it uses more than 200 different factors.
If an SEO consultant or company has determined there is not a technical problem keeping your site from ranking higher, you can improve a site's ranking by making sure it has unique content so it can be easily indexed by those search engines. Try to make your web content truly unique. For example, you can add information specific to your region. Or, you can add additional information that cannot be easily found on other sites, such as your company's product information.
Those are some of the right ways to optimize search engine use. Of course, there are also wrong ways as well. For instance, there is "spamdexing" which involves repeating unrelated keywords to trick a search engine's web crawler into ranking a site more highly. A site that unnecessarily repeats a term, such as "SEO" could end up ranking more highly that a site that mentions the term less often but offers more actual information.
Another SEO technique to avoid is using a link farm. Search engines sometimes rank sites by the number of hyperlinks in the text. Link farms are a group of web sites that hyperlink to each of the other sites in the group.
These and similar techniques are frowned upon by search engine administrators and by web users. Search engines that discover such deceptive techniques may not only reduce the ranking of sites that use them, they can even remove the website completely from the search engine's database. This has happened and not just to fly-by-night, snake-oil-salesmen types. It has even happened with prominent, international companies.
Probably the best and easiest way to optimize search engine rankings is to take the extra time and effort to meet each search engine's guidelines. Keep in mind what a typical search engine user is looking for when trying to find a site like yours. "Do unto others as you would have done unto you" can definitely result in higher rankings in various search engines.
If your website is intended to generate business, it is definitely worth additional time and money for SEO. However, remember the internet is changing rapidly. Even the best SEO research will not necessarily generate higher search engine rankings.
While search engines are an important way to get attention to your site, it should not be the only method you use. Studies have shown that it is more beneficial to get links to your site from other websites. However, by investing in SEO, you can generate more legitimacy to your website.
A T-Mobile G1 Google is shown photographed in Encinitas, California January 20, 2010. REUTERS/Mike Blake
Dave McClure, venture capitalist and founding partner of the Silicon Valley tech incubator 500 Startups, remains a staunch advocate of search engine optimization and its benefits. He shares some of his thoughts about SEO with Reuters.
Q: Do you think it's harder for startups to gain traction with SEO now that Google and other browsers seem to be more quality focused?
A: People can build a history in three to nine months. It's not forever. There's quite a bit of traffic being driven by search and quite a bit of monetization.
Q: Besides technology startups, is SEO important to other small businesses, including those without a deep understanding of tech?
A: Absolutely. There's still a huge amount of traffic that comes from people typing into a search box. The point is, even though social (media) is rising in ascendancy, it's going http://www.socialmediatoday.com/ to take a long time for (SEO) to become irrelevant. To suggest that SEO is somehow over is basically predicating a future that's 10 to 20 years out.
Q: What should small companies be doing to help assure success with SEO?
A: You should build a great product, no question. There's plenty of best practices that use anchor texts for links relevant to your site and content. Reach out and link to other people that are relevant sites and ask them to link to you.
Q: What's changing now in SEO?
A: I think there is rising prominence for social signals. I don't know if they're more valuable than search; they're probably equally valuable at least in terms of driving traffic.