Part 8: Employee Discounts
How would you like to be able to provide your employees with tax-free discounts on a wide range of products and services? Well, you can, and it’s easy to implement in any company of any size.
The term “qualified employee discounts” means giving your employees property or services that you normally provide to the public in your company’s ordinary course of business but you provide them at a discounted price to your employees. If you provide qualified employee discounts, the employees receive the property or services tax-free.
Example: Safe Cracking, Inc., runs a nationwide banking consulting service. If the company provides discounts on banking fees to its employees, this would be a qualified employee discount. However, if it purchases and distributes season’s tickets for the Redskins football games, this would not be a qualified employee discount because the company is not in the business of selling season tickets.
A company can provide discounts on any product or service that it offers to the public—with the following exceptions:
- Stocks and bonds
- Real estate
Sandy’s note: It’s too bad that Congress passed these exceptions. I would have loved to work for a currency house or a bank and get discounts on money. Wouldn’t you?
Limitations on Qualified Employee Discounts
Besides limiting discounts to qualified property, Congress has placed some limitations on the amount of the discount. As a result of some “tax simplification,” the rules vary depending on whether you’re providing services or property.
If you’re providing a service, such as a flight or legal service, you can allow up to a 20 percent tax-free discount.
Example: The law firm of Shaft & Shaft provides legal services to all its staff members at a discount. If the normal fees are $300 per hour, it can offer the legal services at a 20 percent discount, charging $240 per hour. If it offers these services for $100 per hour, the $140 “excess” discount would be taxable to the employee.
If your firm provides discounts on property, the amount of the discount can’t exceed the gross profit percentage. You might be wondering what this means! The gross profit percentage is the sale price minus the cost of the property. Thus, in effect, you can offer the property at your company’s cost.
Sandy’s note: Why Congress couldn’t use the term cost of the property instead of gross profit percentage is beyond me.
Example: IBM offers computers to its employees at a discount. If the normal price of a computer to customers is $2,000 but the profit that IBM makes on each computer is $500, the company can offer its computers to its employees at $1,500. Anything above this discount would be taxable to the employee.
Nondiscrimination Rules: In order to provide qualified employee discounts, you must offer them on a nondiscriminatory basis. You can’t give the discounts just to the officers and other highly paid individuals.
The Bottom Line: Qualified employee discounts can be a real benefit to companies and to their employees. They’re available, however, only for products and services normally provided to the general public. Also, if they are services, the discount is limited to 20 percent. If the discounts are for property, they’re generally limited to the gross profit percentage, which means that the employee can pay the cost of the property.
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