Introduction The US Tax Code excludes nine types of fringe benefit expense from taxable income. Business Travel Expenses that are "lavish or extravagant", says the IRS, are not tax deductible. Qualified Tuition Reduction A qualified tuition reduction is tax-free. Housing Most types of job-related housing cost are deductible. Pensions Tax-privileged retirement plans: ERISA, ESOPS, IRAs etc. Company Cars Personal use of a company car is usually a taxable non-cash fringe benefit. Medical Expenses Benefits received from health-care plans are generally taxable; the current regime will no doubt be substantially changed by President Obama's health-care law, when finally passed.

NOTE: The tax regime applying to all fringe benefits is highly complex, and professional advice should be taken before planning any scheme designed to minimise taxation. These notes are intended simply to give a general overview and should not be relied upon as a basis for action in any particular case.

Introduction

The US Internal Revenue Code excludes nine types of fringe benefits from taxable income:

1. No additional cost services are services, normally offered for sale by the employer to customers in the ordinary course of business, that are provided to employees for personal use at no additional cost to the employer. (Example: free standby flights provided by an airline to its employees.)

2. Qualified employee discounts are discounts: (a) on merchandise, that are not in excess of the gross profit percentage on regular price sales of the merchandise to customers, or (b) on services, that are not in excess of 20% of the regular customer price. (Example: a discount of 40% on merchandise costing a department store $50 and normally sold for $100 [50% gross profit percentage].)

3. Working condition fringe benefits are those whose costs, if borne by the employee, would be deductible as ordinary and necessary business expenses. (Examples: use of a company car or airplane for business purposes, benefits provided for employee safety, on the job training, and merchandise provided for off site product testing and evaluation.)

Cash payments do not qualify as working condition fringe benefits unless the cash is provided for use in connection with a deductible business activity, such use is verified by the employer, and cash not so used is returned to the employer.

4. De minimis fringe benefits are those whose value is so minimal that accounting for the benefits would be administratively unreasonable or impractical. (Examples: occasional personal use of copy machines, coffee and doughnuts, occasional tickets to sporting or entertainment events, and local telephone calls.)

5. Employer operated athletic facilities are those located on the employer's premises, operated by the employer, and used primarily by current and retired employees and their spouses and dependent children.

6. Qualified meals and lodging are those provided on the employer's premises, for the convenience of the employer, and, in the case of lodging, required as a condition of employment. (Examples: lunch provided to employees who must work during normal lunch hours because of peak business activity, housing provided to a hotel manager.)

7. Qualified tuition reimbursements are payments made, under an accountable and nondiscriminatory plan, for job related education that maintains or improves skills required for the individual's employment or that is required as a condition of employment. Payments made for education necessary to meet minimum job requirements or to qualify the individual for a new trade or business are not excludable from income.

8. Qualified employer transportation benefits include up to $120 (2009) per month in mass transit passes or reimbursement for mass transit or vanpooling expenses, local transit fares given to employees doing occasional overtime, cab fares or similar assistance for employees working in unsafe conditions, and up to $230 per month (2009) in parking benefits. Allowances for bikers were introduced as of 2009.

9. Qualified moving expense reimbursements are excludable from income if: (a) the expenses would be allowed as deductions by the employee, and (b) the employee did not deduct the expenses in a prior year. Moving expenses normally deductible by an employee include the cost of moving household and personal goods and the cost of travel between the old and new residences.

There are some limitations on the above. Highly compensated employees may not exclude: no additional cost services, qualified employee discounts, or qualified meals and lodging from income unless those benefits are provided in a manner that does not discriminate in favour of the highly compensated employees.

Other fringe benefits, including, but not limited to, dependent care assistance, group term life insurance, medical and health insurance, legal assistance, death benefits, and incentive stock options, may be excluded from taxable income, usually subject to dollar limitations, if provided to employees under written, nondiscriminatory plans which adhere to specified formats, rules, and regulations.

With few exceptions, taxable fringe benefits are liable to income tax withholding and payment of social security, Medicare, and Federal unemployment (FUTA) taxes.

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Introduction The US Tax Code excludes nine types of fringe benefit expense from taxable income.

Business Travel Expenses that are "lavish or extravagant", says the IRS, are not tax deductible.

Qualified Tuition Reduction A qualified tuition reduction is tax-free.