Issue

A question we get sometimes is whether or not “employee discounts” are taxable to the employee.  What if the discounts are available to an employee’s family?

Situation

Troas Bible College (TBC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii).  They are required to file Form 990 annually.  TBC’s Controller calls to ask us about employee discounts.

“At a recent board meeting, one of our trustees inquired as to whether the 15% employee discounts we offer at our bookstore should be taxable to the employee.”

We reply, “That’s a good question.  And, the short answer is ‘no’ – for “qualified employee discounts.”  However, there are some strictures and limitations.  The discounts need to be within certain limits and they can only include the employees, retired/disabled employees, their widows/widowers, and spouses, and dependent children of any of the above.”

Rules

From Internal Revenue Code Section 132(a):

Gross income shall not include any fringe benefit which qualifies as a— (2) qualified employee discount.

From IRS “Legal Advice Issued by Field Attorneys” 20171202F:

Background. Code Sec. 132(a)(2) excludes from gross income the fringe benefit of qualified employee discounts. An employee for purposes of Code Sec. 132(a) is defined as an individual currently employed by the employer, an individual who retired from the employer, or became disabled while working for the employer, or a widow or widower of any one of these. And, spouses and dependent children of the above-mentioned groups are treated as employees for purposes of Code Sec. 132(a)(2).
In general, a qualified employee discount is any employee discount with respect to qualified property or services to the extent that the discount does not exceed certain limits for services, 20% of the price at which the services are offered to its customers.  If a discount exceeds 20%, then the excess is includable in the employee’s income. Qualified services are those which are offered to customers in the ordinary course of the line of business of the employer in which the employee is performing services.

Bottom Line

  • You should understand “qualified employee discounts” and their nuances.
  • The “employee discounts” are only applicable to “employees” (including retired employees, certain disabled employees, widows/widowers, and the spouses and dependent children of the above).
  • Limitations include a set threshold at 20%.
  • If a discount exceeds 20%, then the excess is includable in the employee’s income.

 

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.