One of your corporate clients has approached you about whether or not its employ
ID: 2636226 • Letter: O
Question
One of your corporate clients has approached you about whether or not its employees are required to include certain benefits provided by the corporation in their income. In particular, the corporation has inquired whether the following benefits provided by the corporation to employees would be included in an employee's taxable income:
I. The employer would like to provide a holiday present to each employee at the end of December. It envisions providing gift cards, including a gift card for dinner at a local restaurant and a gift card for an electronics store. It also plans on providing each employee a $150.00 holiday bonus in a separate check.
II. The employer, which is in the business of providing commercial repair services (such as plumbing, painting, and remodeling), would like to give each employee a $500.00 "credit" each year that the employee can use toward any services or goods provided by the employer. For example, they could use the credit to have interior walls painted, plumbing work completed, or to purchase a new window and have it installed.
Explain to your client the general rules surrounding whether an employee must include benefits provided by the employer in income. Then, for the two proposed benefits mentioned above, explain whether the employee would have to include the amount in income or what provision or exception might apply to make the proposed benefit nontaxable. If the employer would have to make changes to the proposed benefit to render it nontaxable, explain what changes(s) would have to be made. Finally, explain what the resulting benefit would be to the employee and how much, if any, of the benefit the employee could exclude from income. Make sure to detail any significant exceptions or rules that apply to the benefit exception at issue
Explanation / Answer
1. The extra income is always welcomed by the employee but it is taxable in the hands of the employee. Here, the holiday bonus is taxable in the hands of the employee, and also the gift card provided by the employer is equivalent to the cash and non-excludable as the de minimis fringe benefit. Thus, the gift card is also taxable in the hands of the employee.
2. As per the Tax Advice Memorandum (TAM) issued in the year 2004 indicates that to qualify for the de minimis fringe benefit tax the benefit provided should be small in value and non-monetary. The TAM did not provide any threshold to establish the standard but a legal memorandum issued in year 2000 states that the non-monetary reward more than $100 did not qualify for the de minimis fringe benefits. Thus, the “credit” is taxable income in the hands of the employee.
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