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As we’ve read in many news articles, exercise is being touted as a partial cure for many ailments. Wouldn’t it be great if you could deduct the cost of exercise equipment, tennis courts, and even a gym and provide these items tax-free to your employees and, if incorporated, to yourself? The answer is that you can!
Requirements to Bullet-Proof Company-Provided Athletic Facilities from the IRS
To make this benefit tax-free, you must meet several well-defined tests:
- The equipment or gym must generally be on the company premises or leased or owned by the employer. (Thus, it doesn’t have to be physically in the same building as all of the employees.)
- The equipment or gym must be operated by the company.
- The equipment or gym must be substantially used by employees of the company, their spouses, and their dependent children.
There are a couple of implications that can be derived from these rules. First, you can’t pay for a health or country club membership on a tax free basis, since these clubs would be used by the general public and not substantially by your employees. Second, the facilities must be run or operated by the company. This means that you can’t deduct the use of a resort with facilities such as tennis or a swimming pool, which would be part of the association dues.
In addition, the IRS has noted that “employees” can include partners and employees who are separated from the company (either through retirement or disability).
Example: Your company provides a gym in the office for your employees. The gym is staffed by personnel paid by the company. The gym would be fully deductible and tax-free to the employees. If the company paid for health club memberships, on the other hand, this would not be tax-free to the employees. In addition, the athletic facility must not be offered only to officers or highly paid employees. Most staff members should be allowed to use the facility.
Sandy’s note: Self-employed individuals cannot ordinarily give themselves this fringe benefit, since self-employed individuals are not considered to be employees. However, if you’re self-employed and you hire your spouse and/or other family members, they become your employees. If you place a gym in the location where your family employees work, you may be able to deduct the cost of the gym and the equipment. It’s vital, however, that only employees or their family members use this facility. Thus, don’t let your friends use the gym. Keep an exercise log for everyone using the facility.
What Types of Facilities Can We Operate Under This Fringe Benefit?
Under this benefit, you can deduct and provide on a tax-free basis the following types of items:
- exercise equipment
- tennis courts
- swimming pools
- golf courses
Sandy’s note: I really like the idea of being able to provide a golf course to my employees tax-free; however, the cost would be prohibitive to small businesses. However, remember what I have stated earlier: “Where there’s a will, there’s a lawyer.” Check out the next exception.
In case you don’t have the hundreds of thousands or, in the case of golf courses, millions necessary to provide this benefit to your employees, there’s a great exception from having your company pay all the costs. A company can have an agreement with other employers to operate the gym, golf course, or swimming pool. Thus, you find a company currently providing this benefit to its employees and cut a deal to pay rent or a fee so your employees can use this facility. I should note that you must cut a deal with another company that provides this benefit solely to its employees. You can’t go to a general health club or a country club and do the same thing.
Sandy’s note: This is another idiotic rule passed by Congress. I can pay IBM to let my staff use a golf course that it owns and operates, along with employees of other companies that pay IBM for use of this course, but we can’t pay a health club or a country club to do the same thing. Am I missing the point or is this dumb?
Sandy’s tax tip: Normally, self-employed individuals (otherwise known as sole proprietors) can’t set up a deductible gym for themselves. However, if you were to hire your spouse and provide the gym in the location where your spouse works, such as your home, the gym should be deductible if used by you and your dependent children as well. This option, however, has not been tested yet. Moreover, you certainly would need to prove that your spouse performed legitimate business services.
The bottom line: This is a terrific and often overlooked benefit. Just have your company either operate the athletic facility or pay rent to another company that’s operating a facility for its own employees.
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