There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.
Jeremy Wells: In the last episode, I covered two types of fringe benefits that allow an employee to partake in goods and services offered by their employers. Uh, no additional cost services and qualified employee discounts. If you haven't listened to that episode [00:00:30] yet, uh, go back and listen to that one. That's episode 17. It's not critical to listen to that episode first before listening to this one, but it can be helpful. Uh, all of these fringe benefits that I'm talking about in this mini series of episodes here, talk about these fringe benefits that all come from the same code section. Erk 132 but they they that section does kind of mix a few different [00:01:00] ways of thinking about fringe benefits together. So even though they're all fringe benefits, even though the point is to create some sort of value, some sort of compensation for employees, they're not necessarily all the same kinds of compensation. In fact, really, there are eight different kinds listed in that code section. In the last episode, I talked about the no additional cost services and the employee discounts. Really, I think those two go together [00:01:30] as ways of thinking about how an employer can provide the goods or services that that business sells to customers, can provide those to its own employees and a little bit of an advantaged way. In this episode, I'm going to talk about two other fringe benefits, and these are more in line with thinking about how to help employees either be better at their jobs, be more effective, be more productive, uh, or, how to help [00:02:00] employees get a little bit of time off or enjoy the time off that they have.
Jeremy Wells: But again, with the theme of, uh, enjoying their workplace a little bit more or uh, perhaps, uh, raising morale a little bit in the workplace. So in this episode, we're going to look at, uh, the working condition fringes and the de minimis fringe benefits. So for this episode, [00:02:30] the goals here are to first we're going to look at the basic rules for employers providing, uh, actually excludable working condition and de minimis fringe benefits to employees. It's entirely possible for an employer to provide benefits to an employee that are not within the rules, or don't follow the rules, or aren't listed in IRC 132 or the associated regulations. The only [00:03:00] issue is they're not necessarily excludable. So unless there is a an explicit justification for excluding that benefit, either in the code section or the regulations, that benefit is essentially part of that employee's taxable compensation. So the important thing to remember, if you're a tax professional and you're advising employers, you're advising business owners, or if [00:03:30] you're a business owner and you have employees and you're wanting to provide benefits, the goal here is always going to be to do that, to provide those benefits in such a way that it is excludable for the employee. That way, the employee doesn't essentially have to pay tax on the value of that benefit by virtue of being able to exclude that benefit from their taxable compensation. [00:04:00]
Jeremy Wells: Now, as an added bonus, if the business can also deduct that amount that value provided as a benefit, then that of course is a bonus to the business. So for a lot of these fringe benefits talked about in the last episode, as well as in this episode, the goal here is for the business, the employer to be able to deduct the value of [00:04:30] the benefit, while at the same time setting the employee up to be able to exclude the value of that benefit from their own compensation. So that's really the, uh, the goal here. What can happen is if the benefit is offered in such a way that does not follow the rules, or if it's not one of the kinds of benefits that is either explicitly listed or [00:05:00] given as an example in the regulations, or that there isn't some authority that tells us this is an excludable fringe benefit, then that's fine. The employer can still provide that benefit to the employee. It's just that needs to be included in the employee's reportable wages and therefore be subject both to income tax, but then also to payroll tax, Social Security and Medicare tax, as well as well [00:05:30] as any other payroll taxes at the state level that might be incurred as well. I'm not going to get into state payroll tax issues here talking about benefits and compensation, at least not in this episode.
Jeremy Wells: But that's an important thing to keep in mind as well. If you're an employer, your business owner running a business that has employees. Or if you're a tax advisor and you're working with business owners, it's mindful, uh, it's [00:06:00] important to be mindful of these benefits. Generally, if they are excludable for federal purposes, they're probably also excludable for state purposes. But you really need to check and make sure. So either use a reputable payroll service or if you're manually doing the payroll calculations and reporting, make sure that you're aware of the state payroll laws and make sure that the, [00:06:30] uh, benefit is also excludable for state purposes. Another goal is to examine the common examples of working condition and de minimis fringe benefits. Now, there are several examples, uh, a lot of them listed out in the regulations for IRC. 132 and I'll talk about some of the most common ones, especially the ones that I deal with, primarily working with small service based businesses. There [00:07:00] are some others that are helpful to know, depending on what kinds of clients you work with or what kind of business you're operating. However, the combination of I don't typically work with clients in these particular industries or trades, and they're just not as common for small businesses, uh, that I'm usually working with or talking to other tax professionals that are working with clients like that. Uh, and so there are more [00:07:30] examples than what I'll specifically discuss in this episode.
Jeremy Wells: So it's important to go through, uh, the regulations for section 132 to look at those examples. Um, I will talk about some of the most common ones here in this episode, though, at least for the kinds of clients that I work with and that a lot of my colleagues work with. And then finally, we're going to look at how to advise businesses and business owners and employers on providing fringe [00:08:00] benefits to their employees, particularly the two kinds that we're going to talk about in this episode working condition fringes and de minimis fringe benefits. Let's start with working condition fringes. The definition here of a working condition fringe is any property or services provided to an employee of the employer that would be deductible under IRC section 162 or section 167. [00:08:30] So what does this mean? Well, IRC section 162 we know that's discussing deductible business expenses. So those business expenses that are ordinary and necessary. But we're not talking about any business expense any potentially deductible business expense. We're primarily talking about business expenses for that employee that's in the trade or business of being an employee of that employer. And it's [00:09:00] important to make that distinction here. And I'll talk about that a little bit more here in a minute. And then also section 167. Section 167 is on depreciation. So what we're talking about there is if this expense was for some asset of the business that would be depreciable, then that could be included as well.
Jeremy Wells: Basically we're looking at a normal, ordinary and necessary business [00:09:30] expense or business asset that the employee needs in order to be able to function as an employee of that employer. Again, we have to make sure that this is something that is necessary and ordinary for that employee being in the trade or business of being an employee of that employer. Now, if the expense instead relates to that employee's professional activity, [00:10:00] or especially if it's part of a separate business, uh, or trade, then that's not going to meet the qualifications here, because that's going to be something outside the scope of that employee being an employee of his or her employer. So if the expense instead relates to something else, a separate business, a professional activity such as serving on an outside board, consulting privately, or running an [00:10:30] entirely separate venture, then the employer can't exclude the value of that property or service as a working condition. Fringe. The employer's payment in that case benefits the employees outside activity, not the employer's own business. So this. This all comes from IRC section 132 D. That's the code subsection specifically dealing with working [00:11:00] condition fringes. But that particular code subsection doesn't say much. The details are in Treasury Regulation 1.1 32 five. That's where most of the rules about working condition fringe benefits come from. So in particular, this definition of what qualifies as a working condition fringe and therefore what doesn't qualify comes from that Treasury regulation subsection A2 for [00:11:30] purposes of a working condition fringe benefit.
Jeremy Wells: Remember, if you listen to episode 17 on no additional cost benefits and qualified employee discounts. You remember that the definition of employee was an important factor in that discussion, and the same is true here for working condition, fringe benefits as well as de minimis fringe benefits. We have to be clear on what we mean [00:12:00] by an employee, and the definition is a bit broader again, for working condition fringe benefits than what we might think of when we just say an employee. So for purposes of working condition fringe benefits, the term employee includes any individual currently employed by the employer. Any partner who performs services for a partnership, any director of the employer, [00:12:30] and any independent contractor who performs services for the employer. So in ways, this definition is a little bit more constrained than it was for the definition of employee. Use for no additional cost services or qualified employee discounts. Remember those fringe benefits? Also took into consideration former employees. Spouses and dependents of employees, [00:13:00] and even former employees. Those individuals would not be considered employees for purposes of working condition. Fringe benefits here we're only looking at current employees. Similarly, we're also including partners in a partnership. So those individuals, even though they are technically self-employed, if they are providing services to the partnership, they are considered employees for the purposes of working condition. Fringe benefits.
Jeremy Wells: Directors [00:13:30] of the employer. Now here we're talking about individuals that would serve on a board of directors. Typically those individuals are uh, for for larger corporations, those Those individuals are actually compensated for their role as serving as a director on the board of directors. Sometimes they're not, but a lot of times they actually are because they usually do have some requirements. They are expected to, uh, for example, show up and participate in board [00:14:00] meetings that are held periodically monthly, quarterly. Uh, so there usually is some compensation for being a board member. Sometimes, uh, though that's not, uh, compensation as an employee, though usually the terms of service for a board director are not, uh, to the level of actually being a common law employee. So a lot of times they're paid as independent [00:14:30] contractors. But in the case of working condition fringe benefits, they are going to be considered an employee just for the purposes of these benefits. And then finally I mentioned independent contractors with independent contractors. Generally we're going to consider an independent contractors, uh, benefits really as just additional compensation to them. A lot of times when I'm working with clients, they will send, [00:15:00] uh, some, uh, gifts or, uh, a little bit of extra compensation, maybe, uh, provide a meal. I've had clients that want to do something nice for their independent contractors, and so they will, uh, send them gift cards, uh, or fruit baskets, just various kinds of things like that.
Jeremy Wells: And it's a question as to whether that really needs to be included in their compensation, whether the value of those gifts [00:15:30] or those additional, uh, cash or even non-cash payments needs to be reported as part of their compensation. Do those need to be included on their 1099 necks, for example. And so we'll have to look at whether that cash or non-cash gift meets the definition of a working condition, fringe or not. In general, these working condition fringes that we'll talk about provided [00:16:00] to an independent contractor. In these cases, that independent contractor will qualify as an employee. And so those working condition fringes may be excludable. This list of individuals that qualify as an employee for the purposes of working condition fringe benefits comes from that same Treasury regulation section 1.1 32 one B2. Whenever we're talking about benefits, whether [00:16:30] these are fringe benefits or retirement, health insurance, all these different kinds of benefits, there's usually, uh, a concern About discrimination, and we need to be careful when we're, uh, looking at creating certain groups of employees that have access to these benefits, uh, at the expense of other groups of employees that don't. Depending on the kind of benefit, there might be different rules as to whether certain groups can [00:17:00] qualify, but other groups can't, uh, or whether a business is allowed to distinguish between different groups of employees that have access to these benefits or not. In terms of working condition, fringe benefits, there is no, uh, nondiscrimination rule in terms of fringe benefits in general.
Jeremy Wells: That's going to come, uh, from IRC section 132 H1. That's where we get the nondiscrimination for [00:17:30] the purposes of fringe benefits. But then each of the different kinds of fringe benefits, uh, will have their own version of those nondiscrimination rules, or the nondiscrimination rules won't apply at all for working condition fringe benefits. The nondiscrimination rules don't apply at all. Uh, so it is entirely possible for highly compensated employees, for example, to provide working condition fringe benefits just to themselves and not to other employees, or [00:18:00] for the ownership or the management of a company to determine that certain groups of employees get these working condition fringes while other groups don't. And the definition of those groups is not based on some allowable characteristic, like was required for no additional cost services or qualified employee discounts. So again, if you haven't listened to episode 17, go back and listen to that episode where I [00:18:30] discuss these nondiscrimination rules and how they apply to those two types of fringe benefits. And then finally there's another group of, uh, workers that are not employees that qualify here for working condition fringe benefits, and that is bona fide volunteers. So if you work with nonprofit or tax exempt organizations, then volunteers qualify [00:19:00] for working condition fringe benefits solely for purposes of section uh section 132. And that's what we're talking about here with working condition fringe benefits. So despite being a volunteer and not an actual employee of the organization, the individual does qualify for working condition fringe benefits.
Jeremy Wells: And that's from Treasury Regulation section 1.1 30 25R. If you work [00:19:30] with, uh, tax exempt organizations or non-profits, it's in. It's extremely important to understand the rules of what is allowed and not. As far as providing anything that could be construed as compensation to volunteers, the assumption is that as volunteers, bona fide volunteers of a tax exempt or nonprofit organization, volunteers really should not be getting [00:20:00] anything back in terms of compensation for the work that they're doing. Otherwise, they may not be a volunteer anymore. They might be, uh, you know, differently classified as, uh, perhaps an employee, maybe as an independent contractor. Uh, but in terms of those individuals for working condition, fringe benefits only volunteers are considered employees strictly for the purposes of thinking about working condition, fringe benefits. [00:20:30] So if what I'm about to talk about uh, applies to a volunteer, then there's no need to concern, uh, to be concerned about having to, uh, then report any compensation, uh, to those volunteers. Now, if the organization provides some sort of other compensation, uh, compensation that is not considered a working condition fringe, then you might be looking at a situation where that volunteer has effectively earned some compensation from that organization. And that's a whole other set of issues that, [00:21:00] uh, you and that organization would have to deal with. It's important to keep in mind that, uh, some of these working condition fringe benefits, as well as the de minimis fringe benefits we'll talk about later on.
Jeremy Wells: Some of these have strict substantiation requirements in, uh, IRC section 274, if there is a strict substantiation requirement for the kind of expense that the employee, [00:21:30] It has as this working condition fringe, then those exact same strict substantiation requirements apply to that working condition fringe the same way that they would if they were just being paid directly by the employer or by the business. So if IRC section 274 requires meeting certain substantiation requirements to allow a deduction, then those same substantiation requirements apply [00:22:00] to the property or service provided as a working condition fringe. The uh that section IRC section 274 A3 disallows any deduction. Uh, this is one in particular that I see quite often that disallows any deduction for dues paid or incurred for membership in any club organized for business, pleasure, recreation, or other social purpose. This is one I see [00:22:30] quite often, especially with my self-employed clients who as a way of trying to drum up more business. They want to join their local country club, they want to join business organizations, chamber of commerce. They want to join some social, even civic organizations. That's all fine. Um, I, I have done that myself. When I was trying to promote my business in my local [00:23:00] area. However, IRC section 274 A3 says that is not a deductible business expense. So an employer can deduct the expense of that membership if it pays it for an employee as a business expense.
Jeremy Wells: But then that has to be reported as part of that employees compensation Otherwise [00:23:30] the employer, uh, needs to uh exclude but then not deduct that, uh, expense. So the employer actually has an option here. If the employer wants to pay for an employees membership in an organization that is a civic club or a business club or organization, that's [00:24:00] fine, except it either needs to be included in compensation and deducted or not deducted, but then also, uh, excluded. That is Treasury regulation section 1.1 30 25S. It's important to keep that in mind. I get a lot of, uh, clients that are confused because this seems like an ordinary, necessary business expense, after all, especially if it's a business networking organization. It seems necessary and ordinary for [00:24:30] businesses and their owners to be parts of those organizations. However, we've got a strict rule here that those membership dues are nondeductible. Um, and, you know, it's one of those cases where just because something seems like it should be deductible, or rather, it seems unfair that it's not deductible, that's just simply what the law says. Uh, and we have to be aware of that and advise our clients accordingly. For [00:25:00] working condition, fringe benefits that, uh, you know, I'll talk about some examples here in a minute. If an employer provides cash to an employee, that's fine, as long as the employer requires the employee to use the cash according to a specific or Arranged activity that is deductible under IRC [00:25:30] section 162 or 167.
Jeremy Wells: The employee has to verify the correct use of the payment and then return any unspent cash to the employer. This is going to be a pretty substantial difference from de minimis fringe benefits that I'll talk about later on in the episode. For working condition fringe benefits. It's okay for an employer to advance cash to an employee, let the employee use that cash to pay for the expense, and then substantiate that with [00:26:00] the employer by verifying the correct use of the payment, usually by turning in a receipt, and then any of the unspent cash or the change from that transaction that is allowable for a working condition fringe. It will not be allowable for a de minimis fringe, which I'll talk about later on in the episode. I want to get into some examples of these working condition fringes, and one of the most common one is an [00:26:30] employer provided vehicle for business use. It's important to make this distinction here. We are not talking about a business buying a vehicle, and then the owner who's the only worker in that business, uh, also using that vehicle for some personal use. We're also not talking about a vehicle that is provided by an employer to an employee, where that employee then acts as if [00:27:00] that employee now owns that vehicle or can operate that vehicle whenever they want.
Jeremy Wells: What we're looking at here is a specific kind of vehicle that is generally, uh, only going to be used for business. So think your local service providers, your HVAC techs, your plumbers, your pest control, maybe your courier or delivery services, these kinds of, uh, business [00:27:30] vehicles that are strictly going to be used for business, and the employee is going to commute in their own personal vehicle to the business, uh, and then they're going to use that business vehicle during the workday, and then they're going to return it to the company at night and take their personal vehicle back home. We're not talking about a business use of a personal vehicle here. We're talking about business use of a company, uh, vehicle. So employers can exclude, [00:28:00] as a working condition, fringe the business use portion of the value of an employer provided vehicle, as if the employee had personally paid for that use and could deduct it under IRC section 162 or 167. The value of the fringe benefit here equals the total annual value of the vehicle times the percentage of business use miles out of total miles. So if the employee, say, keeps this vehicle [00:28:30] overnight and drives it back home so that they can make a service call early the next morning, there is going to be a personal component, uh, to the mileage now. So now the commute from either that last job or the main office home and then back to the next service call or back to the office the next morning.
Jeremy Wells: That commute was all personal. So that's not going to be included in the business use. So it's important to distinguish that because we're talking about a [00:29:00] vehicle here, even though it's company owned. And this is a common misconception I get with a lot of my clients, even though it's company owned, there still needs to be a written, contemporaneous mileage log. And when we say written, we're also including digital. So it could be a mileage tracker like an app on a phone or a device, but it needs to be tracked. Mileage needs to be tracked. The excludable portion is the business use portion of that vehicle. If there is any personal use, that [00:29:30] portion is not excludable. There are valuation rules in the regulations for how to come up with the value of that use. And actually, those business valuation rules are found in the regulations under IRC section 61, which tells us what is included in income. I believe that's IRC section, uh Treasury Regulation section 1.61 21. That gives us, uh, those valuation rules. But, [00:30:00] uh, there does need to be a distinction between the business use and the personal use. If other employees use the same vehicle throughout the year, then they're legitimate business use. Mileage counts in both the numerator and the denominator. So if it's a if it's a vehicle that gets swapped between different employees if they're assigned a different vehicle every day and they kind of rotate, uh, then that can all be pulled together, which can be beneficial for those employees. [00:30:30]
Jeremy Wells: It can also be a little bit easier in terms of record keeping. But if the employees use is during specific intervals of the year, so that you can identify which dates a specific employee used that vehicle, uh, then the employer has to keep those, uh, separately, tracked those, uh, separately. And the, uh, employers and the employees can't design a schedule such that, uh, the mileage [00:31:00] patterns inflate that business use ratio. And in other words, they've got to treat this fairly. They can't try to game the way they're tracking mileage to reduce that personal use as much as possible. They've really got to be honest with how much of the use of that vehicle is business versus personal. And then if an employer provides different vehicles to the same employee. So say they assign a truck to an employee for the first half of the year. And then they replace that with a new truck and then assign [00:31:30] that second truck to that same employee. Then the employer calculates the working condition, fringe exclusion here separately for each of those vehicles. This is a situation I haven't had to deal with in my own practice, but it's important to keep in mind that because it's possible that if there is a chauffeur involved, uh, then the chauffeur's commute from her residence to where she picks up or drops off, [00:32:00] the employee is considered eligible for the employees working condition, fringe exclusion, but it is included in the chauffeur's income.
Jeremy Wells: Uh, you know, again, I don't have I haven't had to deal with this, but you can imagine cases where perhaps you've got the owner of a business, or maybe you've got you're working with a, uh, you know, some sort of professional services firm where [00:32:30] someone at the top level usually like a partner, uh, maybe they've got a company provided vehicle with a driver. In those cases, it's important to keep in mind the chauffeur's usage of that vehicle versus the employer, the employees usage of that vehicle. The employee will get credit in terms of the ability for the chauffeur's commute, but the chauffeur will, uh, have to treat that commute as their personal use of that vehicle. And [00:33:00] again, employees have to follow substantiation rules. So if an expense has a substantiation requirement, either in IRC section 162 or in section 274, then the employee has to follow those requirements in order to exclude the value of the property or the services. There is a safe harbor available in Treasury Regulation 1.274 60 for [00:33:30] substantiating the use of an employer provided vehicle, the employer includes in the employee's gross income any unauthorized use that doesn't satisfy the safe harbor requirement. So if you have a client or if your business is providing this, then look at that Treasury regulation, see what the rules are there.
Jeremy Wells: And then one final thing on the business use of a company vehicle here is that the listed property limits [00:34:00] apply to the employer but not the employee. And these come out of IRC section 280 cap F and its regulations. These are the depreciation limits on listed property, especially vehicles. Those depreciation limits will apply to the employer in terms of how much depreciation they can take, but they do not affect the valuation of the use of that vehicle by the employee for purposes of excludability. [00:34:30] So you might have two different amounts there. You might have a different amount between what the employer can deduct for that company vehicle versus what the employee can exclude from their compensation. In those cases, you'd want to make sure you understand the rules in section 280 cap F and the regulations versus what's excludable under section 132 D, just real quick along with along the same lines [00:35:00] as a chauffeur, if you're dealing with a business, uh, where the, uh, company vehicle requires some additional security measures. So, uh, maybe this is a vehicle that is owned by a business that works with celebrities that need, uh, additional security measures for their vehicles, such as bulletproof glass. Uh, or maybe the business itself transports valuables. Uh, and so you're talking about armored vehicles? Something like [00:35:30] that. Uh, and then the drivers themselves might be trained in, uh, advanced driving techniques, countermeasures, this sort of thing. Again, this is probably going to be pretty rare, uh, among a lot of the clients that, uh, most small business, uh, small firm accountants work with, however, uh, you never know, you might come across a client that, uh, has this particular situation.
Jeremy Wells: Then the cost of the transportation with additional security in excess [00:36:00] of the amount of normal transportation costs is excludable as a working condition fringe. Now, the personal trips in the commuting are still never deductible or excludable, However, the additional cost of those additional security measures is still deductible. General concern for the employees safety is not a bona fide, business oriented concern. So to qualify, the employer has to establish, through facts and circumstances, a [00:36:30] specific basis for concern regarding the safety of the employee. Examples here are going to include death threats, kidnaping, serious bodily harm to the employee, or a similarly situated employee. So if there's somebody with a similar title or in a similar office of that employer, uh, that is of a similar, uh, rank or position, then that individual may qualify as well. Or uh, a recent history of violent activity, [00:37:00] uh, in that geographic area. Again, that's probably going to be pretty rare for most of our clients if you're a tax professional. However, if you come across this, then look at the Treasury Regulation 1.1 325M and the rules for these additional security measures here. One important thing to note that it can't just be the vehicle that is upgraded with these additional security measures, [00:37:30] that has to be part of an overall program that protects that employee on a 24 hour basis, at home, at work, during commutes.
Jeremy Wells: All of that product testing is another kind of working condition fringe here. So sometimes employees are asked to test and evaluate new products that the employer is providing. An employer can exclude the value of those consumer goods manufactured for sale to customers, [00:38:00] provided to employees for product testing and evaluation outside the workplace, but the employer has to limit the availability of the product to employees just to a period necessary to test and evaluate its performance. Require the return of the product at the end of that testing period, and then require detailed reports by the employee on the testing and evaluation. Now, before, when I was talking about who qualifies as an employee for purposes of working condition [00:38:30] fringes, there's an exception here. Directors and independent contractors do not qualify. So if you have an independent contractor and you provide samples of a product to that independent contractor to test that, the value of those test samples need to be included in that. Independent contractors compensation, regardless of whether you, as the employer and the independent contractor, follow the rest of the rules. So it's important to keep that [00:39:00] in mind. Any products for testing or samples that are sent to an independent contractor or director have to be included in compensation. Job related education is another working condition. Fringe. Go back and listen to episode seven of this podcast.
Jeremy Wells: That episode is all about education and being able to get some tax benefits from education. And in that episode, I specifically cover deductible [00:39:30] education under IRC section 127. So as a working condition, fringe job related education can qualify if it qualifies under IRC section 127. So make sure you go back and listen to episode seven on deductible versus non deductible education costs. Especially for job related education, traveling for work can be an ordinary and necessary expense. If an employee needs to travel to meet a client [00:40:00] or attend a sales function, or maybe an industry event, then that travel can certainly be a deductible expense for the employer. It can also be an excludable benefit for that employee being able to go on that trip. So an employer can exclude the value of a flight on employer provided aircraft as a working condition fringe. If the cost of the flight was deductible [00:40:30] under section 162 or section 167. So, in other words, any personal aspect of that flight, such as tickets for children or personal destinations would not be deductible and thus are includable in gross income. This is from Treasury Regulation section 1.1 325K. Now this also ties in with IRC section 274 m3, which disallows any deduction for amounts paid [00:41:00] or incurred for travel expenses of a spouse, dependent or other individual accompanying an employee, unless the employee can adequately show that the other individuals presence on that trip has a bona fide business purpose.
Jeremy Wells: So it's important to make sure that we're looking at travel costs for our small business clients and their owners and employees, making sure that that travel is really [00:41:30] for bona fide business purposes, that we're accounting for any personal aspects of those trips or for any individuals that were also part of that expense, that were paid for with business funds that weren't actually there for business purposes. That's, uh, some common examples of working condition fringes. There are a few others, but, uh, there's also some more discussion of the employee [00:42:00] provided, uh, vehicles. However, those details are usually beyond the scope of what I regularly encounter with my clients. And if you do have a need for looking into those details, then I do strongly recommend reading through the regulations closely for those. So with that, let's move on to de minimis fringe benefits. And these are what I think some of the most interesting ones to talk about with clients. Because there there can be in [00:42:30] the taxpayer's mind the business owner's mind. A lot of gray area here. However, usually we have to be the bearer of bad news and say that's not really a deductible benefit or it's not an excludable benefit. So it's really important to understand the rules for working condition fringes, but also especially these de minimis fringe benefits. So a de minimis fringe benefit includes any property or service provided [00:43:00] with a value that is so small.
Jeremy Wells: After taking into account the frequency with which similar fringes are provided by the employer to its employees, as to make accounting for it unreasonable or administratively impracticable. This is from IRC section 130 2E1. That's the general definition of a de minimis fringe benefit. There is a specific kind of fringe benefit that is discussed [00:43:30] in IRC section 130 2E2 for an employer provided eating facility for employees. I'm going to talk about that a little bit more, uh, in a few minutes. But as far as de minimis fringe benefits in general go, an employer determines the frequency of the provision of a de minimis fringe by reference to each individual employee. So, for example, providing a daily meal to a single employee is not a de [00:44:00] minimis fringe benefit that is a regularly occurring benefit. And so that's not de minimis, uh, with respect to that employee, even though if we were just looking at the number of meals provided annually to all employees, it might be a relatively small number and appear infrequent for that particular employee. It is not de minimis, and therefore it would be included in that employee's compensation. But if it's administratively difficult to determine [00:44:30] frequency with respect to individual employees, then the employer determines the frequency with respect to the entire workforce. So, for example, if an employer exercises sufficient control and imposes significant restrictions on the personal use of a company copying machine, and this is a this is a typical example here.
Jeremy Wells: Uh, so that at least 85% of the use is for business purposes, then any personal use is considered de minimis. Fringe. This is Treasury regulation 1.1 [00:45:00] 326B. I like this example. Um, I try to run a paperless office, so I'm not worried about anyone using the copying machine. My firm staff are all remote, but I have worked in offices before where there was a copying machine, and occasionally an employee just wanted to do some personal printing or copying off of that copying machine from the employer's perspective. They're not going to sit there and count every single sheet of paper [00:45:30] that is printed off or copied off, and then have to attach a value to that and assign that income to that employee. That's just impracticable. Um, it's administratively unreasonable, uh, in order to do that. Now, if there's a significant usage to where most of that usage is personal, then there needs to be some accounting for that. But if most of that use is business. Then, even though it might [00:46:00] be possible to count every single page that every single employee prints and distinguish between business and personal, somehow, it's just not administratively worth it. Uh, and so this is a specific example that's given in the regulations where the employer can pretty much just ignore the personal use here and consider that an excludable de minimis fringe benefit. Now, what is specifically not allowed is any cash or cash equivalent as [00:46:30] a de minimis expense.
Jeremy Wells: And this is one that I often run into with my clients, where I have to explain that if you are giving any amount of cash or cash equivalent, that is no longer an excludable de minimis fringe benefit, cash or cash equivalents are never excludable as a de minimis fringe, because it's not unreasonable or administratively impracticable to account for cash and cash equivalents. If I buy all of my employees gift cards for a holiday, [00:47:00] or if I give them each a gift card on their birthday, I can see exactly how much I spent on those gift cards, and I know exactly how much I spent for each of those employees. So even though in terms of frequency and amount, it might appear de minimis, I can specifically and administratively identify how much was spent, how much those gifts are worth, and therefore that is never going to be excludable. Now, what is excludable [00:47:30] is the typical example given of a de minimis fringe benefit of a holiday ham or turkey for employees. Usually these things are sold by weight. There's not a specific amount per employee, and each employee is going to get one, but it's not really worth it to go back and try to assign each individual employee a certain amount, a certain valuation. And plus this is just a typical example of something that employers do toward the end of the year, as a sort of holiday [00:48:00] gift. A show of appreciation to their employees.
Jeremy Wells: They will give them a holiday. Ham or turkey, uh, for the the holidays as a sign of appreciation. In fact, this is the example that the Congress's Joint Committee on Taxation used in their discussion of IRC section 132, the code section that gives us these fringe benefits as enacted as part of the Deficit Reduction Act of 1984. That's [00:48:30] the example that Congress used to explain what a de minimis fringe benefit is. However, even if a company has a history of providing a qualifying de minimis fringe benefit like that and then switches to providing an almost equal value cash or cash equivalent in lieu of that minimis benefit, then that's no longer excludable. In fact, there's a technical advice memorandum [00:49:00] 2004 37030 where the IRS looks at a case where an employer stopped giving, uh, holiday hams or turkeys and instead gave a $35, essentially a gift certificate to, uh, not just one, but several, uh, local grocery stores. The gift certificate showed $35 as face value and could be used at several different grocery stores in the area, the IRS said this is now a [00:49:30] cash equivalent, and it no longer qualifies as a de minimis fringe benefit. Now, again, just like working condition fringe benefits, nondiscrimination rules don't apply to de minimis fringe benefits. Office snacks, uh, and occasional meals is another common example here. So coffee donuts soft drinks in the office. That's a regular example of a de minimis fringe benefit.
Jeremy Wells: Occasional meals or meal money provided [00:50:00] to employees so they can work overtime. That has to be part of it. It has to be so that that employee can work overtime. I'm an accountant. I work in tax sometimes in March or April or September and October. When we're pushing deadlines, we need to put in some extra hours. I try to avoid that as much as possible, but sometimes it's inevitable. And so in that case, providing a meal or some money specifically to purchase [00:50:30] a meal in order to push through and continue working during overtime. So buying lunch or buying an early dinner that can be a de minimis fringe, just as long as it's not regular, and then the occasional party group meal or picnic for employees as well as their guests, or plus ones that can all qualify as de minimis fringe benefit as well. I want to clear up one point of confusion here that [00:51:00] occurred back in the summer of 2025 with the passage of the BBA, the 2017 Tax Cuts and Jobs Act, or Tcja, amended IRC section 274, in which made these kinds of de minimis snacks and meals only 50% deductible before tcja. They were 100% deductible. Tcja made these 50% deductible, so office snacks, meals [00:51:30] provided to employees, working overtime, group meals, uh staff, uh parties and picnics, that sort of thing are now 50% deductible. They have been, uh, since 2018. Tcja also added IRC section 274, which makes uh Expenses related to an employer operated eating facility.
Jeremy Wells: Nondeductible. So if you have a client that has an office, and that office includes a cafeteria, and [00:52:00] that cafeteria operates in such a way that it actually charges the employees money. Um, and so it's almost a, a revenue center and a profit center of its own. Then starting after 2025, the expenses related to that entire facility are no longer deductible at all. Now, I don't work with many employees that have their own cafeterias, because most of them don't even have, you know, facilities for their employees. But it is important [00:52:30] to note that starting after 2025, the expenses for those facilities are nondeductible. Now, what the Oba did, was it revised slightly? Uh, some of these rules that were already in place, uh, due to Tax Cuts and Jobs Act, and I saw a lot of social media posts along with other tax professionals. I saw a lot of social media posts that claimed that Obama made office snacks and donuts and soft drinks. [00:53:00] This sort of thing. Nondeductible and includable. And neither one of those is true. Office snacks are not provided in an eating facility. What Obama did, uh, was, uh, reinforced the TCG rule, uh, that after, uh, 2025, those eating facilities expenses were nondeductible, with some exceptions for very particular industries, most of those having to do with shipping [00:53:30] and fishing. Nothing doing with most of what our clients are doing. These expenses related to office snacks and occasional meals provided to employees.
Jeremy Wells: They continue to be 50% deductible and they can be fully excluded from employees compensation. That rule did not change at all. Another de minimis fringe is an employer provided cell phones. Uh, an employer providing a cell phone to an employee qualifies as a fringe benefit. If the employer provides [00:54:00] the phone for non compensatory business purposes relating to the employer's business. In other words, that phone has to be provided to the employee so that the employee can be on call. And so the employee can do business while they are on their own personal time or away from the office. This is not the business, just providing cell phones to employees just to boost morale. That's explicitly not considered non-compensatory uh, reasons [00:54:30] that cell phone also should not be included in employment contracts as part of that employee's compensation plan. Rather, that cell phone is provided to make that employee available when the employer needs, even if that employer is away from the office. If the employer provides that cell phone for noncompensatory business purposes, then the IRS considers the value of the business use of the portion of the phone, a working condition, fringe, and any personal use a de minimis fringe benefit. [00:55:00] So a lot of times with our clients, we're trying to get at what portion of their cell phone use is business versus personal. But if that cell phone is provided by an employer to an employee, then in general the entire amount is excludable the business use portion as a working condition, fringe the personal use portion as a de minimis fringe.
Jeremy Wells: We would still encourage that employer to keep tabs on their employees [00:55:30] and their usage of those devices. We want to make sure that it's primarily there for business purposes. But in general, the entire value of that cell phone and its plan is going to be excludable for the employee, as well as deductible for the employer. Employers can give gifts for holidays and special occasions. Again, back to that typical example of an employer providing a holiday ham or turkey to [00:56:00] its employees. Uh, the gift should be occasional, though, and not extravagant. Typical example again, that holiday, uh, turkey or ham or flowers or a gift basket for a personal achievement, for an illness or for a family crisis, all of that is perfectly fine. These are usually one off or occasional, maybe annual. Probably not more often than that. Holidays, birthdays, special occasions, um, those kinds [00:56:30] of, uh, gifts are deductible, but then also excludable as de minimis fringe benefits. And again, cash cash equivalents are never allowed as an excludable de minimis, uh, benefit. So giving a gift basket to an employee worth $35 as a show of appreciation or as a holiday gift, perfectly fine, [00:57:00] giving that same employee a $35 gift card to a restaurant or to a store that $35 needs to be included in compensation. So gift cards, gift certificates, coupons with a face value, even if the value matches that of an otherwise excludable gift.
Jeremy Wells: And there's a clear intent to purchase that gift that still does not qualify as a de minimis fringe benefit. I want to quickly run through some [00:57:30] things that are common, but non-excludable fringes season tickets to sporting or theatrical events. The occasional one off ticket is fine. Those are generally going to be entertainment expenses and not deductible. But as a one off gift, it could be excludable. If it's something along the lines of a seasonal ticket or an annual package, that's not going to be excludable. The commuting use of an employer provided automobile or other vehicle is not going to be excludable. [00:58:00] Any kind of membership in a private country club or athletic facility employer provided group term life insurance. That is not going to be excludable if it's on the life of the spouse or child of an employee. That life insurance policy has to cover the actual employee, and then any kind of use of an employer owned or leased facility, such as an apartment, hunting lodge or boat for a weekend or a week off. We've got, um, [00:58:30] I've worked with clients where they want to rent a cabin for a week to get away and do an annual reset, maybe have a, um, you know, time to do some strategic planning or deep thinking about their business. That's generally not going to be a deductible business expense.
Jeremy Wells: It would be a stretch to say that that was an actual business expense. In general, that's not going to be an excludable fringe. Um, either not a deductible expense for the business or not an [00:59:00] excludable fringe for the the employee or the partner. The key takeaway here, as with all things tax and business, is that documentation is key. So if you have an employee that is providing these kinds of benefits, whether they're goods or services to the employees, documentation is key. Insist that that business owner have some sort of documentation in place of what [00:59:30] was given and when, what the value of it was. If there is a strict substantiation requirement for that kind of expense, especially those under IRC section 274, that that substantiation is in place and well documented, but it's always going to be best practice to clearly document in writing who earns what kinds of benefits. Even if there are no nondiscrimination rules for the particular kind of benefit, it's still good practice to document [01:00:00] who can actually earn that benefit when they can expect them, and what the value of those benefits are going to be. If you found value in this episode, please let me know by leaving a comment and liking this episode, either in your podcast player or if you're watching on YouTube. Uh, and for the next episode, we're going to close out this coverage of fringe benefits with the remaining kinds of fringe benefits listed in IRC section 132. Thanks for listening. [01:00:30]