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fringe-benefits11

Fringe Benefit 11: Reimbursed Country Club and Health Club Dues

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Before 1987, country club dues were deductible to the extent used for business. Sadly, Congress did some “tax simplification”; thus, you know that you were shafted.

Today, there’s generally no deduction for you or your company for country club or health club dues. However, if an employee uses the club for business, any payments made for club dues would be deemed tax-free to the employee to the extent that the club is used for business under the working condition fringe benefit rule, as discussed above.

Sandy’s note: Thus, if the club were used in part for business, some of the club dues would be tax-free to the employee using the club. The dues, however, would not be deductible by the company, as a result of the tax simplification law.

Example: The Getwithit Corporation pays $2,000 a year to a health and golf club for use by its marketing employee. If the employee uses the club 40% for business, 40% of the $2,000, or $800, would be tax-free to the employee, who would be taxed on the remaining $1,200.60 The employer would get no deduction for the dues.

However, if the company treated the club dues as fully taxable compensation, it could deduct the entire amount as compensation, and not club dues, but the employee would be taxed on the full amount.

Example: If, in the above example, Getwithit treated the $2,000 as additional compensation, it could deduct the entire amount as compensation and the employee would get taxed on the full amount, even the portion that he or she used for business. So much for tax simplification.

Thus the bottom line is that either the employer gets a deduction and the employee gets taxed on all of the dues or the employer gets no deduction for the dues and the employee pays taxes on some of the dues.

Sandy’s hot tip: The key is to have your company reimburse employees only for the business use of the club. Thus, only the business portion would be disallowed as a deduction by the corporation, but the employee gets that portion tax-free. The corporation should treat the portion that’s not used for business as “additional compensation” to the employee in order to take a deduction for this portion.

Sandy’s note: An employee would establish business use by keeping some form of tax diary or tax organizer showing what business was discussed each day that he or she used the club for business and the name of the person with whom it was discussed. One final point: the disallowance of the club dues deduction by Congress does not apply to other types of expenses. Thus, business meals at your club would be deductible. The same reasoning would apply to golf caddie fees, green fees, tips, etc.

The bottom line: health club, golf club, and country club dues are not deductible by a company unless it treats them as additional compensation to the employees who use the club. The company can forgo the deduction so the employee could receive some of the benefits tax-free, but only to the extent that he or she used the club for business


 

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