Page 278 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

264 The Complete Guide to Executive Compensation

connection with the operation of these entertainment facilities. Thus, they have become a
very expensive perquisite. Furthermore, any club expenses need to be carefully viewed in
light of IRC Section 274, which states that no deduction shall be allowed “for amounts paid
or incurred for membership in any club organized for business, pleasure, recreation or other
social purpose.”
Conventions and Conferences. Oftentimes meetings are structured to allow ample time to
enjoy golf, tennis, and other recreational facilities nearby. Since the individual’s expenses are
reimbursed by the company (for which the latter takes a business deduction) without any
income liabilities, the executive is in effect receiving no-cost mini-vacations. Conventions on
foreign soil are eligible for the same consideration if it is as reasonable to hold them offshore
as in the United States. For some, this is added incentive to ensure multinational membership.
Executive interest is probably moderate.
Credit Cards. A number of companies provide their executives with credit cards. The
company not only pays the annual charge but may in fact pay the full interest charges (with-
out attempting to separate business from personal usage). In addition, where the company is
billed directly, it may be slow in requiring reimbursement from the executive for personal
charges. These amounts are in effect interest-free loans; nonetheless, because of the few
dollars involved, this is only of low interest.

Domestic Staff. Company provision of personal domestic staff for the executive at either no
cost or reduced expense is an extension of home entertainment expenses but likely to draw
attention. Newspapers and trade journals periodically identify executives who have had
company workers build extensions on houses or undertake significant renovations.
Such assistance may either be short term or an ongoing service. Similarly, it may either be
provided by company employees or on a contractual basis. Typically, such services trigger
imputed income and are tax deductible to the company. However, the perceived value to the
executive may be high due to the quality of service received and its visibility.

Expense Account. In addition to the normal travel and entertainment policy of the company,
certain individuals may be given broader discretion through liberalized expense accounts. As
long as the situation qualifies as a business expense and, in the view of the IRS, is not
“lavish or extravagant” (Section 274(k) of the IRC), it is 50 percent tax deductible per Section
274(n) of the IRC.
A variation of this is to give the executive an expense account of a stated amount (e.g.,
$100,000) not subject to company review. The company considers the total amount compen-
sation expense, and the executive uses as much as possible for business-related expenses.
Since the company does not reimburse the executive for expenses, the individual will itemize
those nonreimbursed items on the tax form. Thus, if an executive incurred $20,000 of busi-
ness expense, he or she would have a $10,000 tax deduction. A liberal expense account often
receives a high rating from executives.
First-Class Travel. Another well-received perquisite is first-class travel on commercial
business trips, or even business class. Certainly, it makes sense to provide such accommoda-
tions for those individuals who are entitled to use the corporate aircraft (since it approaches
if not exceeds first-class commercial accommodations). Some companies, however, restrict
usage to a certain number of air miles or time in flight before permitting such coverage.
When first-class or business class accommodations are not covered on international flights,