Tuesday, March 26, 2013

Tax Break for Employee Discounts


When an employer gives something for free to its employee, like an apartment or a car, that item is treated as taxable compensation to the employee.  But what about employee discounts?

Internal Revenue Code section 132(c) provides that employee discounts is not taxable compensation, up to a limit:
1. the employer can sell goods at cost to its employees, and
2. the employer can provide services to its employees at up to 20% discount from the regular prices.

The employer must be selling the goods or services to general customers.  For example, a Ford dealership can sell a Ford car at cost to any of its employees without generating taxable income, while a Macy's that sells a car at an employee discount would result in taxable income to the employee-buyer.

Anything above the limit is taxable income to the employee.  The fact that goods can be sold at cost is of great relief to anyone who works in a clothing retailer, where the store markup is usually more than 20%. 

The tax-free benefit does not apply to discounts offered to employees of another company  Thanks to vigorous lobbying from department stores, a special rule provides that a department store can lease counter space to other companies (like cosmetics firms), and those separate companies' employees can receive the department stores' "employee" discounts (and vice versa).

When the fringe benefit rules were added in 1984, the employee discount can be provided to an employee or a retired employee, or their spouses, dependent children, and certain widows.  A very special rule was quickly added in 1986 to provide that parents can also receive employee discounts, but only for an employee in the airline industry. 

Tax-free employee discounts are not limited to retail workers, though they do not apply to real property or investment property.  A company like Boeing could sell its $150 million airplanes to its assembly line workers at cost, if it were so inclined, but more commonly appliance manufacturers sometimes arrange for their employees to get discounts on their products. 

Section 132 Certain fringe benefits.

(a) Exclusion from gross income.
Gross income shall not include any fringe benefit which qualifies as a—

(1) no-additional-cost service,

(2) qualified employee discount,

***

(c) Qualified employee discount defined.
For purposes of this section —

(1) Qualified employee discount.
The term “qualified employee discount” means any employee discount with respect to qualified property or services to the extent such discount does not exceed—

(A) in the case of property, the gross profit percentage of the price at which the property is being offered by the employer to customers, or

(B) in the case of services, 20 percent of the price at which the services are being offered by the employer to customers.

(2) Gross profit percentage.

(A) In general. The term “gross profit percentage” means the percent which—

(i) the excess of the aggregate sales price of property sold by the employer to customers over the aggregate cost of such property to the employer, is of

(ii) the aggregate sale price of such property.

(B) Determination of gross profit percentage. Gross profit percentage shall be determined on the basis of—

(i) all property offered to customers in the ordinary course of the line of business of the employer in which the employee is performing services (or a reasonable classification of property selected by the employer), and

(ii) the employer's experience during a representative period.

(3) Employee discount defined.
The term “employee discount” means the amount by which—

(A) the price at which the property or services are provided by the employer to an employee for use by such employee, is less than

(B) the price at which such property or services are being offered by the employer to customers.

(4) Qualified property or services.
The term “qualified property or services” means any property (other than real property and other than personal property of a kind held for investment) or services which are offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services.

***

(j) Special rules.

(1) Exclusions under subsection (a)(1) and (2) apply to highly compensated employees only if no discrimination.
Paragraphs (1) and (2) of subsection (a) shall apply with respect to any fringe benefit described therein provided with respect to any highly compensated employee only if such fringe benefit is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees.

(2) Special rule for leased sections of department stores.

(A) In general. For purposes of paragraph (2) of subsection (a), in the case of a leased section of a department store—

(i) such section shall be treated as part of the line of business of the person operating the department store, and

(ii) employees in the leased section shall be treated as employees of the person operating the department store.

(B) Leased section of department store. For purposes of subparagraph (A) , a leased section of a department store is any part of a department store where over-the-counter sales of property are made under a lease or similar arrangement where it appears to the general public that individuals making such sales are employed by the person operating the department store.
 

1 comment:

  1. Employee leasing is a contractual arrangement in which the leasing company, also known as a professional employer organization (PEO), is the official employer.
    Staff Leasing Services

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