Tax Status of Fringe Benefits, Related Changes Keep Payroll’s Attention

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Taxability of employer-provided fringe benefits is an important issue for payroll professionals and one that has been affected by the new federal tax law, a payroll manager said May 15.

Qualified transportation benefits were among the nontaxable fringe benefits that, under the new Tax Cuts and Jobs Act (Pub. L. 115-97), saw changes including the suspension of bicycle commuting benefits and qualified moving expenses from tax year 2018 to 2025, said Fred Basehore, CPP, senior manager at KPMG LLP.

In addition, qualified parking, transit pass, and van-pooling benefits are valued at up to $260 a month for 2018, he said.

Generally, fringe benefits are taxable unless they can be proven to be exempt from taxation, Basehore said at the annual American Payroll Association Congress in National Harbor, Md.

How difficult a benefit is to track and how often it is provided determines whether a benefit is de minimis, not any value it may have, Basehore said, noting that de minimis fringe benefits are the most confusing section of the Internal Revenue Code’s Section 132.

For example, brief personal use of a company car ordinarily would be taxable, but in practice is de minimis because it is difficult to track and report, he said.

As a basic rule, cash or cash equivalents, such as gift cards, are always taxable, Basehore said, noting that gifts of any kind are taxable unless they are de minimis.

Awards to an employee may not exceed $1,600 in a year and the average value of a single award may not exceed $400, or the amount over the limit is taxable, Basehore said. A qualified length-of-service and safety award may not be taxable if the award is tangible property, he said.

Qualified nontaxable employee discounts must not exceed 20 percent of the discounted item’s normal selling price or the gross profit margin when the item is sold to customers, Basehore said, noting that discounts are taxable if they are unrelated to the employer’s business, such as computer discounts if the employer does not sell computers.

Employer-provided services to employees are not taxable if no substantial expense is incurred, Basehore said.  For example, airline employees’ standby flights are not taxable unless they are taking the place of a paying customer, he said.

Working-condition fringe benefits, which include services or property such as the use of a company car for business purposes, qualify as nontaxable if they would have been deductible on the employee’s individual income tax return if the employee had paid for it, Basehore said.

Basehore is a member of the Bloomberg Tax Payroll Library Advisory Board.