When is a Minimal Fringe Benefit Not So Minimal?
Every employer knows the value of fringe benefits to employees, particularly when the benefits are of the type that are not included in an employee's compensation and not subject to tax. And when the business can deduct the cost of the nontaxable benefit, it's truly a win-win. Very minimal or de minimis fringe benefits are just this kind of benefit and typically include items like occasional tickets to a ball game or an employee picnic. But what exactly constitutes a "minimal" benefit? And what would cause the Internal Revenue Service (IRS) to revoke one of its own rulings on this issue?
A de minimis fringe benefit is broadly defined as any property or service that you provide to your employees that has such a small value that accounting for it would be unreasonable. The IRS also considers frequency a key consideration in determining if a benefit is minimal.
Cash and cash equivalent fringe benefits (for example, a gift card), no matter how small the amount, cannot qualify as a de minimis benefit, except for occasional meal money or transportation fare.
IRS Revokes a De Minimis Ruling
In a letter ruling, the IRS determined that clothing and accessories, most with the employer's business logo, which employees received and were required to wear while performing services for the business, would be considered de minimis fringe benefits. The IRS considered the items' values and how frequently the employees received them, and ruled that the items' values were so small that the administrative costs associated with accounting for them would be administratively impracticable.
The IRS then decided to reconsider the ruling and requested additional information from the employer regarding the benefits. In a ruling revoking the original decision, the IRS stated that the additional information contained "variations attending the acquisition and distribution of the clothing and accessories" and that it couldn't rule whether the benefits were de minimis because of the facts. Confusing? Yes, because the IRS didn't specify exactly what led to the ruling revocation, just that it was "inappropriate to rule in this case, because of the inherently factual nature of the problem involved."
De Minimis Benefits Are Anything But Minimal for Small Businesses
Does this mean that you should forgo these types of benefits for your employees for fear of creating a tax issue for yourself and them? No, because for small businesses, de minimis benefits are one of the few types of employee benefits where they can compete with much larger businesses. In addition, due to the often closer relationships between small business owners and their employees, you have the ability to give benefits with objectively little worth but which are subjectively worth much more to specific employees.
You have four employees, and one has a teenage daughter who is a big fan of the latest teen singing sensation. It just so happens that you are able to obtain two tickets to the singer's local sold-out concert. You give the tickets to your employee so that he and his daughter can go to the concert. The tickets have a low dollar face value but are priceless to your employee who is now a hero in his daughter's eyes.
It isn't too difficult to understand how important these types of benefits can be when you want to retain employees, make them feel valued as individuals and raise morale, and do it at a cost that won't break the bank!
So if you wish to provide your employees with fringe benefits of this type, what should you take away from the IRS's "non-decision?" The ruling underscores the need to avoid violating the spirit of the rule for minimal fringe benefits by erring on the side of caution when assessing the value of items or services provided to employees. In addition, don't forget about the frequency of the benefits. If you're frequently providing de minimis fringe benefits to your employees, the IRS may use that fact to require that the benefits be included in employees' compensation.