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In general, employees are not taxed on fringe benefits IF offered on a nondiscriminatory basis

In general, employees are not taxed on fringe benefits IF offered on a nondiscriminatory basis If only highly compensated enjoy the benefit, the value of the benefit is considered taxable income. Definition of Highly Compensated. Any employee who, during the current or preceding year:

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In general, employees are not taxed on fringe benefits IF offered on a nondiscriminatory basis

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  1. In general, employees are not taxed on fringe benefits IFoffered on a nondiscriminatory basis If only highly compensated enjoy the benefit, the value of the benefit is considered taxable income

  2. Definition of Highly Compensated Any employee who, during the current or preceding year: • Was at any time an owner of more than 5% of the business; or • Received compensation from the employer in excess of $110,000 (in 2009, as indexed).

  3. Fringe benefits are non-cash compensation benefits • Employee discounts • No-additional cash services • Company cafeterias and meal plans • Qualified transportation • Qualified retirement planning services • Gyms and athletic facilities • “Working condition fringes” • “De minimis fringes”

  4. Employee Discounts Employee receives discount on retail merchandise sold Advantages for employer: • Employees value discount • Low cost to employer • Promotes products

  5. Employee Discounts Tax implications Employee discounts are excluded from taxable income IF discount: • Is offered to employees in nondiscriminatory manner • Does not exceed employer’s gross profit percentage • Items are available to customers in ordinary line of business (real estate and investment products excepted)

  6. No-Additional-Cost Services Discounted services provided to employees at low or no cost Advantages • Services valued by employee • Low or no extra cost to employer • Utilizes excess capacity that generates norevenue

  7. No-Additional-Cost Services Tax implications No-additional-cost services are excluded from taxable income IF discount: • Offered to employees in nondiscriminatory manner • Does not cost employer OR is < 20% of retail price • Relates to services offered to customers in ordinary line of business

  8. Company Cafeterias and Meal Plans Tax rules are complex Not taxable IF: • Section 119 “on-premises” plan: • meals furnished • for convenience of employer • on business premises • Section 132(e)(2) “on or near” plan: • employer operates eating facility • on or near business premises • revenue covers or exceeds cost of operation • access nondiscriminatory

  9. Company Cafeterias and Meal Plans Generally, other types of meals or meal plans are taxable to employee unless employees are working away from home Application Exercise An employee of Comstock Printing invites her husband to join her for lunch in the company cafeteria, located on the business premises. Must this employee consider her lunch or her husband’s lunch taxable income?

  10. Qualified Transportation Includes: • Transportation in “commuter highway vehicle” • Transit pass for use on public or private transit system • “Qualified parking”

  11. Qualified Transportation Advantages • Benefit is tax-free to employees and tax-deductible for employer • Unlike other fringe benefits, can be offered on cash-option (salary reduction) basis • No nondiscrimination requirements

  12. Qualified Retirement Planning Services Excluded from employee taxable income if offered on nondiscriminatory basis: • retirement planning services • tax preparation • legal services • brokerage services Note: Services can go beyond those related to participation in employer’s qualified retirement plan

  13. Gyms and Athletic Facilities Tax Free to employees IF: • On employer’s premises (can be away from business) • Operated by employer • Substantially all use is by employees, and their spouses and dependents

  14. Working Condition Fringes Property or services an employer provides an employee that IF the employee paid for them, the payment would be allowed as an employee business expense deduction De Minimis Fringe Goods or services so small that accounting for them is “unreasonable” or “administratively impractical

  15. Application Exercise Which of the following would be taxable to an employee? • Occasional money for meals or local transportation • Taxi fare to travel after business hours to or from unsafe area • Group-term life insurance on spouse or child • Use of company lodge for the weekend • Season theatre tickets • Flowers or gifts for reward, illness, family crisis

  16. Employee Discounts In addition to employees, discounts can be offered to • Retired or disabled employees • A widow(er) of an employee of the business • A spouse or dependent child (as defined by IRC)

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