I was just updating my book, and Taxbot University in order to discuss the tax free fringe benefits available under the new law. Accordingly, I will be presenting a series over the next month on this valuable topic. Make sure to read each post and feel free to share with all of your friends. Some of these posts, such as the first one, will be rather long, but I can assure you that they will be worth your time in reading them.
Part I. Tax-Free Use of Property, Equipment, and Services
You’re going to like this. This is one of the broadest ways to obtain tax-free fringe benefits. This benefit is also known as working-condition fringe benefits. These types of benefits are defined as “any property or services given to an employee by an employer that would have been deductible or depreciable by the employee as a business expense had the employee paid for the property or services.” It applies, however, only to employees and not to their dependents—sorry! Here are some examples:
- Most business publications
- Business-oriented books
- Use of employer-provided cars to the extent used for business
- Computers used for business
- Cell phones
- Fax machines
- Memberships in business-oriented associations
- Memberships to business-oriented Web sites
- Job-placement assistance if it results in some benefit to the employer, such as raising the morale of remaining workers, and the placement is in the same or similar trade or business
Example: Sam runs his insurance business as a corporation. He wants to receive memberships in the local Chamber of Commerce and life underwriters association. He also wants to receive various publications for insurance agents and various sales publications. His corporation may provide Sam with these memberships and subscriptions as tax-free working-condition fringe benefits because Sam could have deducted the cost of these publications and memberships had he spent the money himself.
Author’s note: You may be wondering why a working-condition fringe benefit is such a good deal because the employee could have deducted the cost of such an item anyway. Good question! The reason is that when an employee takes a deduction for business-related expenses, it’s as an itemized, non-business deduction. These types of deductions have phaseouts and must exceed a threshold amount of 2 percent of your adjusted gross income (net income from a business plus wages, dividends, pensions, rents, etc.). However, if the employer provides these benefits, they are fully deductible by the corporation and tax-free to the employee. There are no phaseouts and no threshold amounts that they must exceed. Thus you get the full benefit of the deduction.
Example: Marjorie operates her network marketing business as an S corporation. She wants to subscribe to various home-based business publications and subscribe to special services for networkers, such as The Greatest Networker Web site maintained by the well-known John Milton Fogg George Madeau. If her corporation pays for these subscriptions, she may receive these benefits tax-free.
Discrimination Is Fully Allowable
This is one benefit in which Congress allows for any type of discrimination, even if the benefit is provided only to the officers or directors or other highly compensated employees of the company. You just can’t discriminate when providing any product testing. Don’t ask me why!
Example: Sock’em Corporation provides cell phones and computers only to its executive officers. These benefits are fully deductible by Sock’em and tax-free to the employees even though they’re not provided to all employees.
What Is an Employee?
The working-condition fringe benefit applies to employees. Strangely, however, Congress allows many people to be treated as employees that you would never have thought would qualify for this one benefit. For example, for purposes of this rule, employees would include partners and members of the board of directors (although board members can’t be used in any product testing). In addition, independent contractors are allowed to be given working-condition fringe benefits on a tax-free basis as long as they don’t involve parking or product testing.5 Self-employed owners are not deemed employees under this rule; however, they can deduct these items anyway as business deductions without any limitation. Thus, in effect, they get the benefits too
Author’s note: I often wonder what Congress was thinking when it carved out such limited exceptions as product testing and parking for independent contractors. This simply adds needless complexity for some narrow exceptions.
Consumer Testing of Products by Employees
Your corporation can provide employees with products to test and evaluate that are manufactured by you for sale to customers. However, to avoid taxation of the employee on the receipt or use of these products, you must meet the following conditions:
- It would be a normal expense of the employer (which is usually the case).
- Valid business reasons necessitate that the products be tested off the premises of the employer.
- The products are indeed furnished for testing and evaluation.
- The products are available to the employee for a period that isn’t longer than needed for testing and evaluation.
- At the end of the testing period, the item is returned to the employer.
- The employee must submit detailed reports on his or her evaluation.
- The length of the testing and evaluation period is reasonable for the product.
- The employer imposes strict limits on personal use, such as a prohibition against non-employees using the product.
- The employer does not discriminate against highly compensated people in the testing unless it can show a good reason.
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