TAXABILITY OF FRINGE BENEFITS - PARTS 1 & 2

TAXABILITY OF FRINGE BENEFITS - PARTS 1 & 2
Welcome to the Taxability of Fringe Benefits, Parts 1 and 2 in a series of three. What is a Fringe Benefit & When Is It Taxable? Commonly Provided Fringes

Presenter Internal Revenue Service Michael Durland
Tax Exempt and Government Entities Federal, State & Local/Employment Tax (FSL/ET) Formerly Federal, State & Local Governments (FSLG) Michael Durland Revenue Agent, Charlottesville, VA I’m Michael Durland, a revenue agent with Federal, State and Local Employment Tax, FSL/ET. My organization was previously known as Federal, State and Local Governments, FSLG, which is how you will still find it sometimes on our website, Today we will discuss the taxability of certain fringe benefits for state and local governments. If you're not currently on our mailing list to get invitations for our on-line events directly and you would like to be, subscribe to the FSLG newsletter. You may do this by visiting IRS.gov, clicking on the search box in the upper right corner and entering FSLG Newsletter. You’ll see many options for getting relevant information for state and local governments.

What Is a Fringe Benefit?
Cash Property Services in addition to regular wages A fringe benefit is a form of pay in addition to stated pay for the performance of services by an employee or an independent contractor. It may include property, services, cash, or a cash equivalent.

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 The value of a fringe benefit provided to an employee must be added to the employee's taxable wages unless the benefit is specifically excluded by a section of the Internal Revenue Code. The fringe benefit is taxable to the employee even if the benefit was for another individual, for example, the employee's spouse or child. The taxable fringe benefit must be included in the employee's wages and reported on a Form W-2 and is generally subject to federal income tax, Social Security, and Medicare tax withholding. It's taxed at the same rates as the employee's regular wages. There are exceptions to this, though. For example, certain deferred compensation plans, such as 457(b) and 403(b) plans, adoption assistance, and excess group term life insurance may be subject to Social Security and Medicare taxes but not the federal income tax withholding. If the employee has already reached the current calendar year maximum Social Security tax wage limit, then Social Security taxes are not withheld from the payment. This limit is $128,400 in 2018. If an employee's wages are not normally subject to Social Security or Medicare taxes, any taxable fringe benefit would also not be subject to Social Security or Medicare taxes. A certain fringe benefit may be part of a collective bargaining agreement, but this does not affect its status as a taxable or non-taxable fringe benefit. You must follow the rules related to each fringe benefit, whether it's part of a collective bargaining agreement or not.

Special Accounting Rules
Reporting period Regular or supplemental withholding November/December benefits election Election not to withhold There are special accounting rules for fringe benefits. There are also certain elections for some fringe benefits. There are four general special rules and elections. The first special rule is the determination of the reporting period. Taxable fringe benefits are reported when an employee receives them and included in the employee's wages that year. The employer also has the choice of when to withhold employment taxes, as you will see. The employer may choose to treat taxable fringe benefits as paid in a pay period, paid quarterly, paid semiannually, or paid annually but no less frequently than annually. If an employer provides a recurring taxable fringe benefit to an employee, that employer may combine the benefits for the period recognized. The second rule, or election, for employers is whether to use regular or supplemental withholding rates on the taxable fringe benefit. Employers may include the fringe benefit to the employee's regular wages and withhold on that total or withhold at the supplemental wage rate of 25% on just the fringe benefit. The third special rule is the November/December benefits election. This election allows an employer who provides benefits to employees in November and/or December to treat those benefits as paid in the subsequent year. Only the value of benefits actually provided during the last two months may be treated as paid in the subsequent year. You do not have to notify the IRS that you are choosing this special accounting rule. An employer may apply this rule as they choose, using it for some fringe benefits and not others. Fringe benefit accounting periods may vary from employee to employee; however, the same rule must be used for all employees receiving a particular fringe benefit. The fourth special rule is the non-withholding election. This election only applies to employer-provided vehicles. The employer may elect not to withhold income tax on the taxable use of an employer's vehicle that's includable in wages if the employer notifies the employee and the employer includes the benefit in the employee's wages on the Form W-2 and withholds Social Security and Medicare tax.

Valuing Non-Cash Fringe Benefits
FMV: What would it cost employee to buy benefit from an unrelated third party? The next item to consider when paying fringe benefits to an employee is the value of that benefit. You may pay employees either a cash or a non-cash fringe benefit. The problem faced is how to value the non-cash fringe benefit. The employer must determine the fair market value of the item; that is, determine the amount a willing buyer would pay a non-related seller. The amount reported on the Form W-2 is fair market value at the time the employee receives the non-cash fringe benefit.

Fringe Benefit Code Sections
Examples: IRC 119 – Meals and Lodging IRC 127 – Educational Assistance IRC 132 – General Fringe Benefit Section Now, once you determine the value of the fringe benefit, the next consideration is which fringe benefits are taxable and which are not. As a general rule, all fringe benefits are taxable unless excluded by a specific Internal Revenue Code section. What Internal Revenue Code sections come into play with fringe benefits? Some of the common code sections that deal with potential exclusions from taxable income are Internal Revenue Code Section 119, which deals with meals and lodging; Code Section 127, which covers education assistance programs; and Code Section 132, covering specific fringe benefits not covered by any other section. Remember that these are just a few of the code sections with the limitations and requirements that need to be met before a fringe benefit is excludable from taxable income. Let's discuss the common fringe benefits excludable from taxable income.

Working Condition Fringe Benefit
Definition: Property or service that employee would have been entitled to deduct on 1040 if employer hadn’t provided it Our first category is working condition fringe benefits. A working condition fringe benefit is property or service provided by an employer to an employee that would have been deductible on Form 1040 if an employee had paid for it personally. Therefore, if the cost of an item is deductible by an employee as a business expense, it may be excludable from the employee's wages when the employer provides it.

Working Condition Fringe Benefit - cont
General Rules: Must relate to employer’s business Employee could have deducted expense on 1040 Employee must substantiate business use There are a few general rules to apply when determining whether a fringe benefit qualifies as a working condition fringe benefit. These general rules specify that the benefit must relate to the employer's business; the employee would have been entitled to a deduction on their Form 1040 tax return if they had paid for it themselves; and the employee substantiates actual business use with records. If you have a question on whether an expense is deductible on a Form 1040, you may refer to Publication 17 or Publication 529 for detailed instructions, or you may call this toll free number:

IRC 132(e)-De Minimis Fringe Benefit
General Rules: Property or service that is: small in value, and provided to employee infrequently, not regularly Many of you have heard the phrase, "Oh, that's de minimis," usually implying that something doesn't count somehow. Section 132(e) of the Internal Revenue Code provides for another excludable fringe benefit known as de minimis. A de minimis fringe benefit is defined in Section 132(e) as property or services provided by an employer to an employee that is of small value and accounting for it is unreasonable or administratively impractical. The fringe benefit must not be provided to the employee either frequently or on a regular basis. Examples of de minimis fringe benefits would include coffee, soft drinks, local telephone calls, or a group meal provided on a non-routine basis. The frequency test for de minimis fringe benefits is applied to each employee individually.

What Is A Per Diem Payment?
Method of reimbursing employees for business expenses for overnight travel Reimbursement tax free if rules are met Now let's cover per diem payments. Sometimes an employer will label an allowance or a daily travel allowance a per diem. A non-taxable per diem is a set amount for meal and lodging expense reimbursement for a period of travel away from home on business. If an employer provides a per diem for travel that is not away from home, the amount could be considered a taxable reimbursement. For example, an employer provides an employee with a $10 lunch per diem because he will be traveling away from the office for the day. This is considered a taxable per diem. But what is a per diem? A per diem is a daily allowance that covers lodging, meal and incidental expenses while traveling on business. Reimbursable expenses under a per diem allowance method are substantiated without receipts provided they meet requirements. Let's talk about some of the rules that the employer must meet for non-taxable per diem requirements.

Per Diem Tax free, if: Accountable plan rules are followed, and
Per diem reimbursement is at or below federal rates Receipts are not required The first per diem requirement to meet tax exempt status is that employees and employers practice accountable plan rules. The accountable plan rules will be discussed momentarily. The second per diem requirement is the reimbursement amount is calculated at or below the federal rates. Federal per diem rates include separate rates for lodging, meals and incidental expenses. These rates apply to federal government employees and establish the maximum amounts for different geographic areas that may be excluded per day. The rates are revised every year and are available online at If the per diem amount does not meet the requirements, the reimbursement is a taxable fringe benefit. Remember, when you are using per diem amounts, receipts are not required, but time, place, and business purpose must still be substantiated by the employee.

Per Diem Breakdown Per diem consists of: Rates vary by city lodging
meals and incidental expenses (M&IE) Rates vary by city So let's break down the components of per diem. Per diem consists of two categories. The first category is lodging, and the second is meals and incidental expenses, also known as M&IE. Per diem rates vary by city. They will be higher for travel in a city like New York and lower in a city like Grafton, North Dakota. We will look at lodging and M&IE separately.

Lodging Per Diem Use rate of city where you spend the night
Room tax and energy charges are not part of lodging; they are reimbursed separately The appropriate lodging rate is determined by the city in which the employee spends the night. Let's say you have the luxury of working in Fairfax, but cannot find a place to stay that falls within the per diem rate. Instead, you have to stay in Manassas, Virginia, which is very nice also, and it has a lower per diem rate. Do you use the Fairfax per diem rate or the Manassas per diem rate? Actually, you would use the rate in Manassas. This logic also applies for meals and incidental expenses. Do you know what costs are included with the lodging per diem? This includes the cost of lodging only. Room tax and energy surcharges are not considered part of the lodging cost, so they are additional reimbursement requests.

M&IE Per Diem Includes: Meals Tips for food and luggage handling
Laundry and dry cleaning for travel of less than 4 consecutive nights M&IE, meals and incidental expenses, includes items such as meals, tips and fees for food, and luggage handling services. Laundry and dry cleaning for travel of less than four consecutive nights is also considered included in M&IE. The per diem rate is a set amount, which includes incidental expenses.

Per Diem – Other Rules Prorate M&IE for days employee departs and returns Employer may pay other tax-free business expenses in addition to per diem: room taxes cab telephone charges laundry There are additional rules for consideration when using the per diem rates. One is the proration for M&IE according to the time during the day that travel begins and the time during the day that travel ends. M&IE is to be prorated by one of two methods: Method Number 1 allows for three-quarters of the per diem meal allowance for each of these days. Method Number 2 uses any method that is consistently applied and that is in accordance with reasonable business practice. For example, you may calculate partial days based on actual hours the employee is authorized to travel for business away from home on the first and last day. Many question how they should handle miscellaneous expenses which are not part of the incidental expenses, such as room taxes, cab, telephone charges, and laundry. Reimbursement for these expenses may be considered as tax exempt if the substantiation requirements are met.

Accountable Plans Visit Pub 463, Travel, Entertainment, Gift, and Car Expenses Let's talk now about accountable plans. It is important that you understand accountable plan rules in order to manage your fringe benefit program. When we use the term "accountable plan," we're not necessarily speaking about a written plan. There is no requirement that the plan be written, but it must be an established policy. Many government entities, though, document their accountable plan in a written policy. Accountable plan rules require substantiation of business expenses using actual receipts, mileage logs, and expense vouchers.

What is an Accountable Plan?
Employee is given allowance or reimbursement Amounts are non-taxable, if certain rules are met An accountable plan allows an employer to reimburse employees on a non-taxable basis when certain requirements are met. Accountable plan rules are detailed in Section 62(c) of the Internal Revenue Code. Publication Fringe Benefits Guide, also contains helpful information related to this topic. In order to maintain a qualified accountable plan, there are three requirements which must be met.

Accountable Plan Rules
Business connection Adequate accounting Excess returned on a timely basis First, there must be a business connection to the expenditure; second, the employee must account for the funds within a reasonable period of time; and third, excess reimbursements or advances must be returned within a reasonable period of time.

Business Connection Directly related to trade or business
Deductible on 1040 For purposes of the accountable plan rules, a business connection is defined as those expenses incurred by the employee in connection with services performed as an employee for the entity. Let me give you an example of an expense that meets the business connection requirement. If an employee incurs airfare costs to attend an out-of-town conference which is directly related to their job, the cost of the airfare would qualify. This means that if the expense was not reimbursed by the employer, it would be deductible by the employee on their Form 1040 income tax return as a business expense. Check the IRS Publication 535, Business Expenses, if you are unsure whether an expense would qualify.

Adequate Accounting Verify: Date Time Place Amount Business Purpose
Accountable plan rules require that employees must provide adequate accounting of expenses to employers. The employee must verify the date, time, place, and business purpose of expenses, as well as the amount of the expenses. The employee must provide receipts to the employer. Most employers require employees to submit travel vouchers with the receipts attached to it.

Excess Returned Timely
Return of excess Within a reasonable period of time Accountable plan rules require employees to return any excess reimbursement within a reasonable period of time. A reasonable period of time is described in Regulation Section (g) where an advance is allowed up to 30 days prior to the expense being incurred or paid, the expense is substantiated within 60 days after it is paid or incurred, and any excess amount is returned to the employer within 120 days after the expense is paid or incurred. This is also known as the fixed date method of timeliness safe harbors.

Non-Accountable Plan Does not meet ALL THREE RULES for Accountable Plans When any of these requirements are not met, a non-accountable plan is in place. Payments you make under a non-accountable plan are taxable wages to the employee. The employer is then obligated to withhold payroll taxes from the reimbursements to the employee.

Examples Expense reimbursement, or allowance?
Advance, allowance, or reimbursement? Reimbursements without substantiation are wages Next, let's review just a bit with examples that clarify how the information we've covered so far would apply in common situations that we experience in the field. This first example is about travel expenses. A large city employs workers who incur expenses for in-city travel. The employer decided they would pay employees an allowance every day for any travel expenses they might incur. Even if no expenses are incurred, the same total is paid to each employee. Is this an accountable plan? Is the allowance for travel taxable compensation to the employees? And the answer is this is not an accountable plan because the employees receive payment regardless of the actual expenses incurred. The allowance would be considered taxable compensation to employees to the extent that accountable plan rules are not observed. And now here's another question we've often heard asked: When are advances supposed to be included in income? Well, advances become taxable to the extent they are not substantiated by the employee no later than the first payroll period following the end of the reasonable period of time. A reasonable period may actually end in the year after the advance was made. Remember that after the end of the calendar year any amounts previously reported in wages cannot be reversed unless they were incorrectly included as wages in the first place. Now, let's give an example. A small state agency pays a monthly mileage allowance of $200 to certain employees. The agency doesn't require the employees to substantiate their expenses or return any excess. Therefore, the mileage allowance does not meet the rules for an accountable plan. The $200 allowance is taxable wages to the employees when it is paid to them. In our last example today, we are also often asked what if an employee substantiates expenses and returns excess advances after the employer has treated amounts as wages? Is the employer required to return any withholding or treat amounts as non-taxable? And the answer is, no, the employer is not required to return any withholding or treat the amounts substantiated late as non-taxable.

Cell Phones No longer considered listed property
Notice , I.R.B. 407 Following are the common fringe benefits we'll cover today: Cell phones, accident and health benefits, moving and meal expenses, mileage reimbursements for business use of personal vehicles, and personal use of employer owned vehicles. We'll also respond to multiple questions we've been presented with in the field. Let's begin with the current status of cell phones. An employee's personal use of employer owned cell phones is a nontaxable fringe benefit to the employee if the phone is provided to the employee primarily for noncompensatory business reasons. Personal use of the cell phone provided primarily for a noncompensatory business reason is excludable from an employee's income as a de minimis fringe benefit. This is treated similarly to the personal use of an employer's land line. This is beause cell phones are no longer considered listed property. Listed property is subject to special substantiation rules, obligating employees to keep records of both business and personal use under adequate accounting for accountable plans. The value of personal use is considered wages to the employee. This is still true for employee use of an employer owned vehicle, for example. If both business and personal use records are not kept, the value of all use is included in the employee's wages. Cell phones are sometimes provided to an employee as an incentive, morale booster, a symbol of authority, or an award, and in these cases their value cannot be excluded from an employee's wages since it would be essentially a means of providing additional compensation to an employee. As for employers providing a cell phone allowance towards the cost of operating an employee's personal cell phone for business purposes, the accountable plan rules apply. If, however, the allowance is paid to the employee and no substantiation for actual cell phone business use is ever provided or requested, the amount is essentially additional wages.

Accident and Health Care Plans
Internal Revenue Code Section 105(b) Exempts employer payments for certain medical expenses Includes the cost of insurance Accident, health, and qualified long-term care Contributions to trust or fund to directly or via insurance provide benefits Contributions to Archer MSAs or HSAs Our next topic is accident and health plans. Section 105(b) of the Internal Revenue Code specifically exempts employer payments of certain medical expenses from tax. The exclusion applies to contributions you make as an employer to an employee’s accident or health plan, including the following:  Contributions to the cost of accident or health insurance including qualified long-term care insurance,  contributions to a separate trust or fund that directly or through insurance provides accident or health benefits,  contributions to Archer MSAs or health savings accounts. These are discussed in Publication 969, Health Savings Accounts and Other Tax Favored Health Plans. For this exclusion, employers may treat the following individuals as employees:  A current common law employee,  a full-time licensed insurance agent who is a current statutory employee,  a retired employee,  a former employee you maintain coverage for based on the employment relationship,  a widow or widower of an individual who died while an employee,  a widow or widower of a retired employee. For the exclusion of contributions to an accident or health plan, a leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.

Accident and Health Care Plans2 of 2
Certain reimbursements to employees under an accident or health plan for specific injuries or illnesses Payment must be figured without regard to any period of absence from work This exclusion also applies to payments you directly or indirectly make to an employee under an accident or health plan for employees that are either of the following:  Payments are reimbursements of medical expenses,  payments for specific injuries or illnesses such as the loss of an arm or leg, the payments must be figured without regard to any period of absence from work. What is an accident or health plan? Well, this is an arrangement that provides benefits for your employees, their spouses, their dependents, and their children in the event of personal injury or sickness. Covered children must be under age 27. The plan may be insured or noninsured and does not need to be in writing. There is a special rule for certain government plans. Payments to a deceased plan participant's beneficiary may qualify for the exclusion from gross income if the other requirements for exclusion are met. These other requirements are outlined in Sec 105(j). To be a nontaxable fringe benefit, the employee has to substantiate the expense and observe plan rules. Cash payments for unsubstantiated insurance or care are reportable on Form W-2 in boxes one, three and five.

Moving Expenses IRC Section 132(g): IRC Section 217:
Allows employer to reimburse employee IRC Section 217: Allows individual to deduct certain expenses Let's talk about moving expenses. Expenses which qualify as moving expenses under Section 217 of the Internal Revenue Code are deductions on an employee's federal income tax return. If the employer pays expenses or reimburses the employee, the moving expense payment may be an excludable fringe benefit to the employee under Section 132(g) of the code.

Moving Expenses slide 2 of 2
Not taxable to employee if they are: paid under an Accountable Plan meet specific tests under IRC 217 In order for moving expenses to be an excludable fringe benefit, they must be made under an accountable plan. In addition, there are specific tests under code Section 217 for moving expenses to qualify as nontaxable. You may refer to Publication 521 which provides detailed information on moving expenses. Information on moving expense reimbursements are in Publication 15-B in the taxable fringe benefits guide too. These publications again may be accessed at IRS.GOV. Simply click on the Forms & Instructions box on the home page and type in the document you want in Forms, Instructions and publications Search.

IRC 217 Tests Individual must be an employee who incurs the expenses
Expenses must: closely relate to starting work at new job location be allowed under section 217 meet time and distance tests Let's address some of the specific tests of Section 217 of the Internal Revenue Code. First, the moving expense reimbursement must be made to an employee. The employee must actually incur or pay the expenses. Second, the expenses must be closely related to the time the employee starts work at the new job location. Generally within one year from the date the employee first reports to work at the new location will qualify. The moving expenses must meet the time and distance tests, meaning the employee must work at least 39 weeks during the first 12 months after arriving in the area of the new job location. The distance test is met if the new job location is at least 50 miles farther from the employee's old home than the old job location.

Moving Expenses – Travel Costs
Non-taxable travel costs: Moving other members of household Airfare, car Lodging while travelling Parking fees, tolls Moving expenses are the reasonable expenses the employee incurs for moving their household goods and the travel costs between the former residence and the new residence by the shortest and most direct route. An employee may be reimbursed for the cost of transportation and lodging for themselves and members of their household while traveling from their former home to their new home. An employee may be reimbursed for travel expenses for only one trip to their new home. However, all family members do not have to travel together or at the same time to the new location. The cost of airfare as well as travel by automobile may be excludable. Actual gas and oil costs may be reimbursed or a flat mileage reimbursements may be made. For 2017, the reimbursement mileage rate for moving is 17 cents per mile.

Moving Expenses: Goods & Personal
Non-taxable moving costs - household goods/personal effects: Packing, crating, transporting Shipping car(s) Shipping pet(s) Storage & insurance (30 consecutive days) The nontaxable costs of moving household goods and personal effects include: packing, crating and transporting personal goods, connecting and disconnecting utilities, shipping a car and pets, and storage and insurance of personal goods for up to a period of 30 consecutive days after the goods are moved from the employee's former home and before they were delivered to their new home.

Moving Expenses- Reimbursements
Don’t include reimbursements in income if: the reimbursed expenses qualify under IRC 217, and they are paid in the same calendar year they are deducted Moving expense reimbursements are not included in the wages of the employee if the expenses qualify under Internal Revenue Code Section 217, and they are reimbursed to the employee in the same calendar year they are deducted on their 1040 income tax return.

Moving Expenses Timing of taxability Employer’s reporting on W-2
If an employer reimburses an employee in the current calendar year for moving expenses that the employee deducted in an earlier year, the employer should include the reimbursement in the employee's wages and withhold payroll taxes in the same way as regular wages. Remember that moving expense reimbursements must be part of an accountable plan. If the employee fails to account for moving expenses to the employer within a reasonable amount of time, any advance of reimbursements are included in wages and are subject to income tax withholding, Social Security, and Medicare taxes. Nonqualified moving expense reimbursements must be included in the employee's wages. The value of these reimbursements would be included in the employee's Form W-2 boxes one, three, and five and again are subject to employment tax withholding. Qualified moving expense reimbursements should be reported on Form W-2 in box 12 with code P indicated in the box. Qualified moving expenses you pay to a third party on behalf of the employee such as a moving company or airline are not reported on Form W-2.

Meal Allowances & Reimbursements1 of 11
Meals while traveling Meals while not traveling Meals with meetings or entertainment De minimis meal allowances We're going to cover meal allowances and reimbursements, meals while traveling, meals while not traveling, meals with meetings or entertainment, and meal allowances.

Meal Allowances & Reimbursements 2 of 11
Meals while traveling Tax-exempt requirements: Must be away from tax home overnight, or long enough to require substantial sleep or rest No set number of hours or miles away Substantiation required What are the tax-exempt requirements for meals while traveling? To be tax exempt, the employee must be away from his or her tax home overnight or far enough away to require substantial sleep or rest. Generally your tax home is your regular place of business or post of duty regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located. There is no set number of hours away or miles away that define when you have traveled outside your tax home. Travel meals must also satisfy the accountable plan rules in order to be excludable.

Meals not away from home: Meals with meetings Meals with entertainment De minimis meals What are the taxable requirements for meals not away from home? Generally the meals are taxable as wages to the employee because travel must be away from home and overnight to be excludable. But there are exceptions to the general rule.

Meals with meetings or entertainment: Tax-exempt if meal meets test: “Directly Related” test, or “Associated With” test Meals with meetings or entertainment are reimbursements or allowances provided to employees for meals in the course of entertaining customers and are excludable if the expenses are ordinary and necessary and meet either a “directly related” test or an “associated with” test. We will cover each of these tests next.

“Directly Related” Meals are tax-exempt: business meetings service club or professional meetings Example: Rotary, Finance Officers Association, CPA The first test is the “directly related” test. Entertainment related meal reimbursements meet the “directly related” test and may be excludable from wages if: the main purpose of the combined business meal is the active conduct of business, business is actually conducted during the meal period, and there is more than a general expectation of attaining income or some other specific benefit at some future time. Meals as part of business meetings or meals at service club or professional meetings would meet this test. If the substantiation meets this test, then the expense will be tax exempt.

“Associated With” Test Meals with clear business purpose Substantial business discussion/negotiations directly before or after a meal The next test is the “associated with” test. Entertainment related meal reimbursements meet the “associated with” test and are excludable if: the entertainment is associated with the active conduct of the employer's business and directly before or after a substantial business meeting. Again, if this test is met, then the expense will be tax exempt.

“Associated With” Meals are tax-exempt meals at: conventions conferences What about meals at a convention and at conferences or monthly meetings? Well, reimbursements for meal expenses directly related to and deemed necessary for attending business meetings or conventions of certain exempt organizations are excludable from wages if the expenses of your attendance are related to your trade or business. These organizations would include chambers of commerce, business leagues, and trade or professional associations. This will meet the “associated with” test.

De Minimis Meals are tax-exempt if meal is: small in value and occasional not provided routinely or often provided so employee can work overtime The last topic here is the de minimis meals. De minimis meals are tax exempt if meal costs are inexpensive in value and occasional. Meal money may meet an exception and be excludable if three conditions are met. 1) it's on an occasional basis if the meal is reasonable in value and is not provided regularly or frequently and provided for overtime work. 2) overtime work necessitates an extension of the employee's normal work schedule and the meal enables overtime work. 3) meals provided on the employer's premises that are consumed during the overtime period or meal money expended for meals consumed during that period would satisfy this condition.

De minimis meal Generally, must be consumed during overtime period Not based on number of hours worked Some additional requirements for de minimis meals are that  the meal must be consumed during the overtime period.  A meal allowance based on number of hours does not qualify as de minimis.  Regularly provided meal money does not qualify for the exclusion for de minimis fringe benefits provided by an employer. One example of a de minimis meal would be when a municipality provides a meal for an election worker because they are required to stay on site.

Meal Allowance & Reimbursements 10 of 11
Note: Meals consumed en route to daily business events are not exempt Example: Breakfast and dinner while traveling to and from a daily convention or conference would not be exempt Please remember that meals consumed en route to daily business events are not excludable.

If not staying at a hotel, there is no tax exempt meal reimbursement while traveling to and from event If everyone is responsible for their own arrangements during a lunch break, the reimbursement for lunch is fully taxable And finally, here are a couple of scenarios illustrating taxable meal reimbursements.

Employee’s Car Reimbursed business use is non-taxable if AT or BELOW Federal Mileage Rate Reimbursements to employees for work related usage of their vehicles is our next topic. If the mileage reimbursement to an employee is part of an accountable plan, then that reimbursement would be nontaxable to the employee if it is at or below the current federal rate. If the mileage reimbursement is not part of an accountable plan, it is a taxable fringe benefit to the employee and must be included in their wages. When an employee is given an excess reimbursement over the federal mileage rate, the excess reimbursement is taxable as regular wages and payroll taxes need to be withheld. When there is an excess reimbursement, both the nontaxable and taxable amounts are reported on Form W-2. The amount of the reimbursement up to the federal mileage rate would be shown on the employee's W-2 in box 12 using code L. The amount of excess reimbursement would be included in boxes one, three, and five of the Form W-2.

Standard Mileage Rates
cents per mile cents per mile cents per mile cents per mile cents per mile cents per mile cents per mile cents per mile cents per mile For 2017 the federal mileage rate is 54 and a half cents per mile. Reimbursements for an employee's nonbusiness travel are always taxable, even if paid at or below the federal mileage rate. These reimbursement funds are part of the employee's regular wages with payroll taxes withheld. Nonbusiness travel is considered personal use of the vehicle. Personal commuting between the employee's residence and the principal place of business is nonbusiness travel or personal use even if the employee needs to make more than one trip back and forth between their home and their principal place of business in a day. For example, a college administrator drives back and forth several times each day between their home and the campus for early morning and evening meetings in addition to her regular work day. Even though the employee makes more than one trip per day, all of the trips are still considered personal commuting mileage. For future reference, you may check the IRS website at IRS.gov for the current mileage rate. Mileage reimbursements pertain to business use of a personally owned vehicle. Personal use of an employer owned vehicle is not tax exempt. But there is a category of vehicle commonly found within most businesses, and certainly within government entities, that by their very nature are exempt from personal use documentation requirements and are tax exempt. The category is referred to as qualified nonpersonal use vehicles.

Employer Provided Vehicles – 1 of 3
Qualified non-personal use vehicle by its design is unlikely to have personal use use is tax-exempt Employers need to understand that certain employer owned vehicle use is not subject to personal use valuation. Use of a qualified nonpersonal use vehicle including use for commuting is excludable to the employee. Therefore, it requires no recordkeeping or substantiation. A qualified nonpersonal use vehicle is any vehicle that the employee is not likely to use more than minimally for personal purposes because of its design. If the vehicle qualifies for nonpersonal use, then it is tax exempt to the employee.

Qualified non-personal use vehicles Clearly marked police and fire vehicles School buses Unmarked law enforcement vehicles Special purpose vehicles – snow plows, etc. Vans and pickups must be modified to qualify The following examples are generally deemed qualified nonpersonal use vehicles:  Clearly marked police, fire, and public safety vehicles,  unmarked vehicles used by law enforcement officers if the use is officially authorized,  an ambulance or hearse when used for its designated purpose,  any vehicle designed to carry cargo over 14,000 pounds,  delivery trucks with seating for the driver only or with a folding jump seat,  a passenger bus with a capacity of at least 20 passengers used for its specific purpose,  school buses,  tractors, and other special purpose farm vehicles,  bucket trucks, cement mixers, combines, cranes, derricks, dump trucks, garbage trucks, flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks and refrigerated trucks. A van or a pickup truck with a loaded gross vehicle weight of 14,000 pounds or less qualifies if it has been specially modified so that it's not likely to be used more than minimally for personal purposes. Some ways a pickup might be modified would be a hydraulic lift gate, permanent tanks or drums, permanent sideboards or panels that materially raise the level of the sides of the truck bed. Other heavy equipment like booms, welders, generators or cranes permanently affixed. A qualified nonpersonal use vehicle also includes a truck that is used primarily to transport a particular type of load in a construction, manufacturing, processing, farming, mining, drilling, timbering or other such operation for which it was specially designed or significantly modified.

Qualified non-personal use vehicles Pickup with hydraulic lift attached Pickup with removable tool chest White Van Let's share some examples to help illustrate what a qualified nonpersonal use vehicle is. Consider a pickup truck with a permanent hydraulic lift attached to the truck. Since it is specialized it is unlikely to be used for personal use because of its design, it qualifies as a nonpersonal use vehicle. Revenue Ruling outlines the rules for vans and pickups. They may meet the qualified nonpersonal use definition if they are specifically modified so that personal use is unlikely. Next, what about a pickup truck with a removable tool chest attached? The pickup truck does not qualify since the tool chest can be removed. This also would apply if the pickup truck has a snowplow attached. The vehicle will not qualify since the snowplow can be removed. Also, adding a municipal logo would not make it qualify as a nonpersonal use vehicle. What about a white van? Would this qualify? Well, it might qualify, depending on what the van has inside. If the inside of the van has permanent shelving in it, it meets the requirement to be a nonpersonal use vehicle.

See Publication 15-B for valuation rules on employer provided vehicles: Cents per mile Lease value Commuting rule In contrast to qualified nonpersonal use vehicles, sometimes employees use employer owned vehicles that are not qualified nonpersonal use vehicles. For example, employees might access an employer's vehicle pool for travel or for temporary use as needed. If there is also material personal use, this could be a taxable event. Occasionally an employee is essentially the only person who ever drives a particular vehicle and that use is likely to be taxable personal use. Personal use of an employer provided vehicle is taxable compensation to the employee driver when the use includes commuting, vacation, personal errands or use by family members. When taxable use has occurred, employers must assign value to it, report it as compensation on Form W-2, and withhold employment taxes. How do employers calculate personal use? Three rules are applied to determine the value of personal use by employees: The cents per mile rule, the lease value rule, or the commuting rule.

Lease Value Rule Exceptions If you first used commuting rule If you first used cents per mile rule, but auto no longer qualifies for cents per mile The annual lease value rule may be used for any vehicle. The other two rules may only be used under certain conditions. To use one of the special valuation rules, the employer and employee must timely report personal use as wages. Generally the rules are applied on a vehicle-by-vehicle basis and an employer may use different rules for different vehicles. If you use the lease value method, you must begin using the rule on the first day you make the vehicle available to any employee for personal use, with two exceptions: The first exception is if you used the commuting rule when you first made the vehicle available, you may change to the lease value rule. 2) The second exception is if you used the cents per mile rule when you first made the vehicle available, you may change to the lease value rule on the first day on which the automobile no longer qualifies for the cents per mile rule. If the employer has 20 or more cars used for business and personal use by employees, a fleet average value may be used to calculate the annual lease valuation. To use this rule, all vehicles must have a value below an established certain dollar amount which is announced each year in an IRS notice. For 2017 the maximum value was $21,100 for cars and $23,300 for trucks and vans.

Commuting Rule Commute valued at $3/day Requirements: Employer must own or lease auto Provided to employee for business use Required for valid business reason Written policy forbids personal use Number of commuting days is recorded The commuting rule requires recognition of $3 in wages for each day an employee uses an employer owned vehicle for commuting between their home and workplace. To use this rule in 2017, the value of the vehicle could not exceed $15,900 for a passenger auto or $17,800 for a truck or van. There are certain requirements which must be met before this method can be applied. Number one, the employer must own or lease the vehicle. 2) Number two, the vehicle is provided to the employee for business use. 3) Number three, the employer requires the employee to commute in the vehicle for a valid noncompensatory business reason. 4) Number four, the employer has a written policy and prohibits personal use other than commuting and the employee does not use the vehicle for other than de minimis personal use. 5) And finally, records must be kept to list the number of days an employee used the vehicle for commuting. If the vehicle is an automobile, the employee using the vehicle must not be a control employee.

Examples of de minimis use: Short personal detour Commuting once/month or less See Pubs 15-B & 463 for required recordkeeping and reporting Some personal use is of such little value that is difficult to account for and can be considered de minimis. Examples of de minimis use of an employer provided vehicle that can be excluded from recognition as wages include the following:  A short personal detour while on business, something such as driving to lunch while out of the office on business, or  commuting in an employer owned vehicle not more than once a month. This does not mean that the employee can receive excludable commuting rights 12 days a year, though. The de minimis commuting exception is available to cover infrequent occasional situations, not regular or routine situations. Specific recordkeeping and reporting are required as outlined in IRS Publications 15-B and 463.

Question 1 When a County’s Sheriff squad cars are no longer used in their active fleet, they are provided to the County jail administrators for commuting. The County would like to know if they can use the commuting rule to value the employees’ personal use of the vehicles. Let's respond to questions we frequently receive. This one is about vehicles use and that is the topic we just covered. Our first question comes from a county administration department. They state that when county sheriffs' squad cars are no longer being used in the active fleet, they're made available to the county jail administrators for commuting. The county would like to know how they ought to value the personal use of these vehicles. We recommend employers refer to Publication 15-B for the details or Publication 5137 which is the FSLG fringe benefit guide, and also Publication 463.We mentioned three methods, one of which will apply to the situation depending on certain factors. They are the lease value method, the commuting rule, and the cents per mile rule. The rule that applies in this case depends on more facts and circumstances than we have access to. If the vehicle is no longer a qualified nonpersonal use vehicle, we need to know the value of the vehicle, whether the employer has a stated no personal use policy in place and enforces it, whether substantiation exists, and a little more about how the vehicle is actually used, for example, is the commuting use de minimis or is it routine and frequent. Do all the administrators use the vehicles for commuting or is it essentially one person?

Question 2 We have a policy that specifically prohibits an employee from using a county supplied cell phone for personal reasons and we police the cell phone bills for personal use. We discipline employees for violating this policy. Will personal use still be taxable? A second question concerns cell phone usage. We still get frequent questions about how to handle employer provided cell phones and employee reimbursement of business use of their personal cell phones. The employer states we have a policy that specifically prohibits an employee from using a county provided cell phone for personal use and management polices the cell phone bills for personal use. We discipline employees for violating the policy. Will personal use be taxable? And the answer is no, because any personal use would still qualify as a de minimis benefit, even if any personal use is a violation of employer rules. Employer monitoring of personal use of their employer provided cell phones does not in this situation affect the tax treatment. To recap the issue, how should an employee's use of employer provided cell phones be treated on Form W-2? And the answer is generally it should not be treated as a taxable fringe benefit.

Question 3 If an employer gives a gift certificate for a Christmas turkey or an occasional theatre ticket, what facts and circumstances would allow the employee to exclude these gifts from taxable income? Question number three is a de minimis fringe benefit matter. If an employer provides a gift certificate for a Christmas turkey or an occasional theater ticket, what facts and circumstances would allow the gift certificate to be excluded from taxable income? Well, a gift certificate that is redeemable for general merchandise or has a cash equivalent value is not a de minimis fringe benefit and taxable. In other words, if the certificate holder can choose from all items in the store, the gift certificate is not de minimis because it is a cash equivalent. However, if an employer gives an employee a voucher or certificate that could only be used toward a particular item like a holiday turkey at the local grocery store, it could qualify as a de minimis fringe benefit. Also, when an employer provides an occasional theater ticket to an employee, it may qualify as a de minimis fringe benefit. Remember, the value of the benefit must take into account how frequently it is provided as well as its market value.

Recap – Helpful Resources
Pub 15-B Employer’s Guide to Fringe Benefits Pub 5137 Fringe Benefit Guide Pub 463 Travel, Entertainment, Gift and Car Expenses Pub 535 Business Expenses Pub 521 Moving Expenses Pub 529 Miscellaneous Deductions Pub 969 Health Savings Accounts and Other Tax Favored Health Plans Download docs at Find the section on de minimis fringe benefits in the most current publication of Publication 15-B, The Employer's Taxable Fringe Benefit Guide is a very good source of additional information on this topic. Here are some other useful publications that I mentioned in this presentation and the URL of the site where you can download them.

Useful Telephone Numbers
– TE/GE toll-free tax help – Forms & pubs order site – 1099 and W-2 assistance

Thank You Michael Durland CPA Phone 434-218-6432

TAXABILITY OF FRINGE BENEFITS - PARTS 1 & 2

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