Smart Business talked to Martin Tanenbaum, a tax principal at Tauber & Balser, P.C., about what is being done to monitor fringe benefits.
How does the IRS go about examining the area of fringe benefits?
Many IRS agents use a pro forma employment tax questionnaire geared toward determining which fringes are provided to which employees and how the business treated the fringes for federal employment taxes and income tax withholding. The extensive questionnaire includes a list of the most common perks and instructs the business to identify any other employee fringes that have not been addressed specifically. The examination’s scope, which begins as a review of executive compensation programs, can quickly unfold into issues that affect rank-and-file employees as well.
What is a fringe benefit?
The Internal Revenue Code (IRC) and regulations identify various categories of fringe benefits. IRC Sec. 61(a) states that gross income includes ‘compensation for services, including...fringe benefits,’ except as otherwise specifically excluded by another IRC section.
However, several perks can be provided tax free to employees, if certain requirements are satisfied. These include reimbursements for dependent care expenses (Sec. 129), education expenses (Sec. 127) and adoption assistance (Sec. 137). If no specific IRC exclusion applies, the fringe benefit may still be eligible for exclusion pursuant to the eight categories of excludible fringes listed in Sec.132. Two of these (working-condition fringe benefits and de minimis fringe benefits) are often relied on by businesses to treat benefits as tax free.
What are the requirements to qualify benefits as working-condition fringe benefits?
Sec. 132(d) provides an exclusion from gross income for any property or service provided to an employee to the extent that, if the employee paid for such property or service, such payment would be allowable as a deduction under Sec. 162 (trade or business expenses) or Sec. 167 (depreciation). Working-condition fringe benefits must satisfy three basic requirements to qualify for exclusion:
- The employee’s use of the property or service must relate to the employer’s trade or business.
- The employee would have been entitled to a business deduction if the property or service that was provided by the employer had been purchased by the employee.
- The employee must maintain the required records with respect to the business use of the property or service provided by the employer.
Computers provided to employees for home use may qualify as an excludible working-condition fringe benefit. However, computers are subject to special documentation rules requiring an allocation between business and personal use. The value of the personal use is includible in employee income and subject to withholding, unless excludible as a de minimis fringe.
How do you define de minimis for fringe benefit exclusion purposes?
The term de minimis means (as provided by Sec. 132(e)(1)) any property or service, the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.
Examples of de minimis fringe benefits include occasional personal use of a business copying machine, occasional parties or picnics for employers and their guests, occasional meals, holiday gifts of property with a low fair market value and occasional tickets for entertainment events. Except for occasional meal money or local transportation fare, cash (no matter how small the amount) is never excludible as a de minimis fringe. Even a cash-equivalent fringe benefit, such as a gift card or certificate, is not excludible. If a benefit is not de minimis because it exceeds either the value or frequency limits, the entire benefit is included in the employee’s income.
In addition, the IRS regulations provides examples of benefits that are not excludible as de minimis fringes. These include season tickets to sporting events, memberships in a private country club or athletic facility, and use of the employer’s apartment or boat for a weekend.
Although the IRS has not provided a dollar threshold for meeting the de minimis requirement, it is apparent that the smaller in value and less frequent that a benefit is provided, the more likely it will qualify as de minimis.
MARTIN TANENBAUM serves as a tax principal at Tauber & Balser, P.C. Reach him at (404) 814-4920 or firstname.lastname@example.org.