Internal Revenue Service

1
Internal Revenue Service

• TAXABLE FRINGE BENEFITS
• Sponsored by
• WASHINGTON STATE
• OFM
• June 6, 2008

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Federal, State and Local Governments
Tax Exempt Government Entities

• Marilee Basaraba
• Clark Fletcher

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Fringe Benefits Guide

• 17 Topics on
• Travel and
• Non-Travel Benefits

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FRINGE BENEFITSGENERAL RULESSee Page 4

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WHAT IS A FRINGE BENEFIT?

• Cash or Cash Equivalent,
• Property, or Services in
• addition to Regular Wages

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ARE FRINGE BENEFITS TAXABLE?

• Taxable to employee unless
  specifically excluded by IRC
• Taxable means subject to withholding and
  reported on W-2 in year benefit
  provided

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VALUING NON-CASHFRINGE BENEFITS

• FMV
• What it would cost employee to buy
  benefit from an unrelated party

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FRINGE BENEFIT CODE SECTIONS

• Examples
• IRC 117(d) - Qualified Tuition Reductions
• IRC 119 - Meals and Lodging
• IRC 125 - Cafeteria Plans
• IRC 127 - Educational Assistance Programs
• IRC 129 - Dependent Care Assistance
• IRC 132 - General Fringe Benefit Section

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NON-TAXABLE FRINGESIRC 132

• (b) No-Additional Cost Service
• (c) Qualified Employee Discounts
• (d) Working Condition Fringe Benefits
• (e) De Minimis Fringe Benefits
• (f) Qualified Transportation Fringe Benefits
• (g) Qualified Moving Expense Reimbursements
• (m) Qualified Retirement Planning Services

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SPECIAL ACCOUNTING RULES

• Timing of Taxability - Calendar Year
• Option to Treat When Paid
• Alternative Rule for FITW-Supplemental Wages
• Special Accounting Period
• Employers Election

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ALTERNATIVE RULE

• Federal Income Tax Withholding-Pub. 15
• Two Methods of Withholding
• Add to Regular Wages, withhold as one
• Identify Separately and Use Supplemental Wage
  Rate for the addition- 25 Flat Rate

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ELECTION ON INCOME TAX WITHHOLDING Vehicles Only

• May elect NOT to withhold FIT
• Inform Employee
• Include on W-2
• Withhold social security and Medicare

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ACCOUNTABLE PLAN?See Page 6

• Allowance or Reimbursement
• Where amounts are NON-Taxable,
• If certain rules are met

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THREE RULES

• Business Connection
• Adequate Accounting
• Excess returned

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TIMELINESS SAFE HARBORS

• Fixed Date Method - 150
• Periodic Statement Method - 210
• Other Reasonable Method

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MORE INFORMATION ON ACCOUNTABLE PLANS

• Employers
• can have multiple expense plans
• can have accountable and non-accountable plans
• may be more restrictive than federal tax law
• Employees
• cannot compel an employer to have an
  accountable plan

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NON-ACCOUNTABLE PLAN

• Does NOT MEET ALL 3 RULES
  for Accountable Plan
• TAXABLE TO RECIPIENT

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WHEN TO WITHHOLD?

• Accountable Plan
• No Withholding if All 3 Rules Met
• Otherwise, Withhold no later than 1st Payroll
  Period Following Reasonable Period
• NON-Accountable Plan
• Withhold When Reimbursements Made

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WORKING CONDITION FRINGE BENEFITSSee Page 12

• Definition
• Property or service that employee would have
  been entitled to deduct on 1040, if employer had
  not provided it

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WORKING CONDITION FRINGE BENEFIT

• General Rules
• Must Relate to Employers Business
• Employee Could Have Deducted on 1040
• Employee Must Substantiate

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WHO IS EMPLOYEE FOR WORKING CONDITION FRINGES?

• Current Employees
• Partners or Directors
• Independent Contractors
• Volunteers

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DO NOT QUALIFY AS WORKING CONDITION FRINGES

• CASH PAYMENTS OR EQUIVALENT
• Unless Under An Accountable Plan
• Physical Exams (see IRC 105)
• Club Dues

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IRC 132(e) - DE MINIMIS FRINGE BENEFIT

• WHAT IS De Minimis?
• Property or service that is small in value,
  and
• Provided to employee infrequently,
  not regularly

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EXAMPLES OF DE MINIMIS FRINGE BENEFITS

• Photocopier Use
• Group Meals, Picnics
• Theater or Sporting Event Ticket
• Coffee, Doughnuts, Soft Drinks
• Flowers, Fruit for Special Circumstances
• Local Telephone Calls

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DO NOT QUALIFY AS DE MINIMIS

• CASH OR CASH EQUIVALENT
• CERTAIN TRANSPORTATION FARES
• USE OF EMPLOYERS VACATION PROPERTY, BOAT
• COMMUTING USE OF EMPLOYERS CAR MORE THAN ONCE A
  MONTH

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WHO IS EMPLOYEE FOR DE MINIMIS FRINGES?

• ANY RECIPIENT

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CLIFF PROVISION

• If benefit Does NOT qualify as
• De Minimis, Entire Amount is taxable
  NOT just portion that exceeds
  De Minimis Limits!

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Travel Transportation ExpensesSee page 15

• Key Travel Definitions
• Qualified Travel Expenses
• Tax Home
• Away from Tax Home Overnight Rule
• Temporary vs. Indefinite
• Substantiation Methods
• Per Diem or Actual Expenses Methods

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TRAVEL EXPENSES

• Includes Costs
• Travel to, from, and at Business Location
• Lodging, Meals and Incidental Expenses
• Laundry, Dry Cleaning and Other Expenses

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TAX HOME

• One Regular or Main Place
• More Than One Regular or Main Place
• No Regular or Principal Place

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TAX HOME

• Regular Place of Business
• Includes general vicinity or area
• In most cases, employers office
  is tax home

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AWAY FROM HOME

• Employee must stay overnight or
• Travel longer than an ordinary workday and stop
  for substantial sleep or rest

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SLEEP OR REST RULE

• Court Cases Define Sleep or Rest
• No set distance or hours traveled
• Sleeping or resting in car doesnt qualify
• Usually applies to transportation workers

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TEMPORARY vs. INDEFINITE ASSIGNMENTS

• Temporary Assignments -
  Non-Taxable Less than 1 year
• Indefinite Assignments -
  Taxable 1 year or more

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TEMPORARY OR INDEFINITE ASSIGNMENTS

• Employer must make decision on
  length of assignment when the
  assignment begins

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TRAVEL EXPENSES

• TRAVEL AWAY FROM Tax HOME
• OVERNIGHT - Non-Taxable
• Ordinary Business Expenses
• Lodging and Meals
• If paid under an Accountable Plan, and
• Use Actual Expense Method
• or Per Diem Method

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PER DIEM and ACTUAL Expenses
Reimbursement Methods
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PER DIEM Reimbursement Method

• Non-Taxable, IF
• Under Accountable Plan Rules and
• Per diem Reimbursement is
  at or below Federal rates
• Receipts - Not Required

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PER DIEM BREAKDOWN

• Per Diem consists of
• Lodging
• Meals and Incidental Expenses (MIE)

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MISCELLANEOUS EXPENSES(In addition to MIE)- See
Page 22

• Cab Fare
• Fax/Telephone Charges
• Internet Charges
• Room Taxes
• Energy Surcharges
• Laundry, Cleaning, Pressing of Clothes

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PER DIEM

• For Day of Departure and Return
• Claim ¾ of the per diem meal allowance
• Any other method consistently applied

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PER DIEM

• WHEN TRAVELING TO MORE THAN ONE LOCATION ON SAME
  DAY
• Use the Per Diem Rate
  where stopping for rest or sleep

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TRANSPORTATION EXPENSE REIMBURSEMENTS See Page
24

• Local Transportation Costs
• Air, Train, Bus, Cab, Shuttle
• Mileage
• Tolls and Parking
• Not Away Overnight

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TEMPORARY LOCAL TRANSPORTATIONASSIGNMENTS

• Temporary - NOT TAXABLE IF
• At Single Location
• Expected to Last, and
• Lasts Less than 1 Year
• Away from Main Place of Work
• Not Considered Commuting

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INDEFINITE ASSIGNMENTS

• Transportation
• Taxable, if 1 or more years
• Exception
• If employee goes to
  indefinite site infrequently
  less than 35 days a year

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TRANSPORTATION VS COMMUTING

• Transportation Reimbursements may
  be Non-Taxable
• Commuting Expenses are Personal
  and Taxable

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TRANSPORTATION VS. COMMUTING

• Non-Taxable Transportation
• Residence to temporary work site
  and back
• Regular place of business to temporary
  work site
• Temporary work site to temporary
  work site

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TRANSPORTATION VS. COMMUTING

• Taxable Commuting
• Residence to office
• even if required by employer
• even after work hours
• even on weekends or holidays

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MOVING EXPENSESSee Page 29

• IRC Section 132(g)
• Allows Employer to Reimburse Employee
• IRC Section 217
• Allows Individual to Deduct Certain Expenses

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MOVING EXPENSES

• Non-Taxable, but
• Must be directly related to work
• Paid under Accountable Plan, and
• Expenses meet specific tests of IRC 217
• Individual is employee,
• Expenses are incurred,
• Time and Distance Tests

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WHAT ARE MOVING EXPENSES?

• REASONABLE EXPENSES for
• Moving Household Goods
• Personal Effects, and
• Travel Costs between Residences

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MOVING EXPENSES

• WHAT IS MEANT BY
• TRAVEL TIME
• BEGINS 1 day after former home no longer
  available
• ENDS date employee secures lodging at new
  location

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MEALS AND LODGINGSee Page 31

• Meals are Non-Taxable when
• Provided in-kind, and
• On employers premises, and
• For employers convenience

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MEALS AND LODGING

• Lodging is Non-Taxable, IF
• Provided in-kind, and
• On employers premises, and
• For employers convenience, and
• Required as condition of employment

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MEALS AND LODGING

• On Employers Premises
• Place employee performs substantial duties
• On, not near within business perimeter
• Can be temporary worksite of employer

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MEALSConvenience of Employer

• Provided for substantial non-pay reason
• Depends on facts and circumstances
• Example Pizza provided for lunch to employees
  at meeting.

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LODGING Convenience of Employer

• Required as Condition of Employment
• Indispensable to Job Duties
• Cannot be Optional
• Example
• Firefighters provided meals and lodging at fire
  station

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MEAL ALLOWANCES/REIMBURSEMENTS

• Meals While Traveling
• Meals While Not Traveling
• Meals with Meetings or Entertainment
• De minimis Meal Allowances

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MEAL ALLOWANCES/REIMBURSEMENTS

• Meals While Traveling
• Tax-Free Requirements
• Must be away from tax home overnight, or
  long enough to require substantial sleep or
  rest
• No set number of hours away or distance
• Substantiation required
  

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MEAL ALLOWANCES/ REIMBURSEMENTS

• Meals Not Away From Home
• Meals with Meetings
• Meals with Entertainment
• De minimis Meals

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MEAL ALLOWANCES/ REIMBURSEMENTS

• Meals with Meetings or Entertainment
• Non-Taxable, If Meal Meets Test
• Directly-Related Test, or
• Associated With Test

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TRADE OR PROFESSIONAL ASSOCIATION MEETINGS

• Non-Taxable When
• Necessary and directly related to attending
  business meetings or conventions of certain
  exempt organizations
• Substantiated
• Examples of Meetings
• Chamber of Commerce
• Rotary, Kiwanis

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Substantiation Methods for Meals

• When Away Overnight
• Per Diem or Actual Expenses Method
• When NOT Away Overnight
• Actual Expenses Method

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TAKE A BREAK!

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EMPLOYER - PROVIDED VEHICLESSee Page 41

• Personal use is Taxable
• Commuting
• Vacation, weekend, use by spouse
• Taxable use
• Withhold and Report on W-2

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SUBSTANTIATION REQUIREMENTS

• Business vs. Personal Miles
  Must Be Recorded
• IF NO RECORDKEEPING
• Value of All Auto Use is Wage
• IF RECORDS ARE PROVIDED
• Only Personal Use is Wage

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EMPLOYER - PROVIDED VEHICLES

• Valuing Personal Use
• General Valuation Method, or
• Three Special Valuation Rules
• Lease Valuation Rule
• Cents-Per-Mile Rule
• Commuting Rule

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GENERAL VALUATION RULE

• Computation
• Multiply personal miles x FMV of vehicle
• FMV is cost to lease vehicle
• Recalculate Value after 4 years
• Daily Lease Value less than 30 days
• Fleet Average Value
• More than 20 vehicles
• 2008 19,900 Cars 20,800 trucks

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LEASE VALUATION RULE

• Computation
• Multiply personal use x lease value, and
• If fuel provided, add 5.5 cents per mile driven
• Recalculate after 4 years lease term
• Determine FMV
• Use Pub 15-B Table

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Cents Per Mile Rule

• Must meet 1 of following requirements
• Business Use 50 or more per year, or
• Used each day to commute at least 3 employees, or
  
• Driven by employees at least 10,000 mi/year
• Continued Usage Rule
• Non-Availability Rule
• Computation
• Multiply personal miles x federal mileage rate
• If FUEL NOT Provided, reduce by 5.5 cents
• 2008 50.5 cents minus 5.5 cents 45 cents

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Commuting Valuation Rule

• Personal Use valued at 1.50 each way IF
• Vehicle owned by employer
• Employer requires used for business not
  voluntary
• Employee required to commute
• Employer has written policy no personal use
• Used only for business plus very limited personal
  use
• Not Available for Control Employee
• Elected Official, or
• Executive Level Federal Employee (2008 139,600)

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Qualified Non-Personal Use Vehicle(QNPUV) See
Page 46

• Use (even personal) is Non-Taxable
• Recordkeeping is not required
• Only Certain types of vehicles qualify

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Qualified Non-Personal Use Vehicle

• By Design, is NOT LIKELY
• to be used for personal use, i.e.
• Clearly Marked Police and Fire Vehicles
• School Buses
• Ambulance or Hearse
• Certain Special Purpose Vehicles
• Unmarked Law Enforcement Vehicles

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Qualified Non-Personal Use Vehicles

• Clearly Marked Police/Fire Vehicles
• Employee must always be on call
• Employee must be required to use vehicle
• Personal use outside jurisdiction prohibited
• Marking on license plate doesnt qualify

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Qualified Non-Personal Use Vehicles

• Unmarked Law Enforcement Vehicle
• Employer must officially authorize personal use
• Personal use outside jurisdiction prohibited
• Employer must be responsible for crime prevention
  and investigation
• Employee must be law enforcement officer

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Qualified Non-Personal Use Vehicles

• Law enforcement officer is
• authorized to carry weapons
• execute warrants
• make arrests

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Qualified Non-Personal Use Vehicles

• Substantiation By Employee is Not Required
• if ALL of the following are met
• Vehicle owned by Employer
• Vehicle only use is employers business
• When not in use, kept on employers premises
• No employee using vehicle lives on employers
  premises
• Written policy prohibits personal use
• Employer believes vehicle is NOT used for
  personal use

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Qualified Non-Personal Use Vehicles

• Employer Must
• Maintain a written policy prohibiting personal
  use
• Monitor, i.e.
• vehicle sign in/out log
• Employee signs statement agreeing to no personal
  use
• No personal use other than commuting

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Equipment Allowances

• Ordinary and Necessary Business Expenses, or
• Allowances paid or reimbursed are
• Excludable from Wages
• When Accountable Plan Rules Followed

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Work Clothes /Uniform Allowances

• Required as a condition of employment
• Not worn or adaptable to general wear
• Excludable
• If Follow Accountable Plan Rules

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Safety Equipment

• Safer Work Environment
• Follow Accountable Plan Rules
• Excludable from wages
• Does not have to be required

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Mileage Allowances

• Flat Amount Paid to Employee
• Fully Taxable as Wages
• When No Substantiation Required

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Cell Phones/Electronics

• Listed Property (like car)
• Must Account for Business Personal Use
• Substantiation Requirements
• Personal Use must be Included in Wages
• Value Personal Use

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Personal Use of Cell Phones

• Employee can reimburse Employer
• or
• Employer can provide an Allowance
• Offsets Employees Business Use of their personal
  cell phone
• No accounting
• Included in Wages When Paid to Employee

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Cell Phones

• Look for new law from Congress to remove Cell
  Phones from Listed Property Rules
• Not Signed YET!

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RESOURCES

• GOVERNMENT ENTITIES Toll Free Phone
  1-877-829-5500
• FSLG Website www.irs.gov/govts
• FSLG Contacts
• Marilee Basaraba
• Email marilee.basaraba_at_irs.gov
• Clark Fletcher
• Email clark.m.fletcher_at_irs.gov

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ANY QUESTIONS????
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SURVEY

• 5 Easy QUESTIONS
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• Leave completed on table

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