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May 30, 2013


Amenities at work and the definition of taxable income

Many tax controversies ultimately come down to a very basic question: Does something need to be counted as income? This is not a question that can be answered in the abstract. It depends, rather, on the specific provisions of a very detailed and densely-packed federal tax code and its state counterparts.

In Texas and across the nation, one common way in which the is-it-income question arises is through various employment benefits. It is well known, of course, that favorable treatment for health insurance benefits has historically been a key driver of an employer-based system for delivering those benefits.

But there are many other types of benefits that employees get from employers. Some of them are amenities that could perhaps technically be considered income. This does not mean, however, that this is how the IRS or state revenue agencies treat them in practice.

For example, some employers have free or subsidized dry cleaning at the work site. Employers also sometimes offer free meals.

But again, this does not necessarily mean that an occasional free pizza or a favorable deal on getting your pants pressed means that you have undeclared income.

In the case of meals, in particular, the general rule is meals offered “for the convenience of the employer” are not considered compensation. If there is a business purpose for the meals, the test is met and the meals are not considered taxable income. And it is usually not that difficult to show a business purpose.

To be sure, one can never be sure when an issue may require tax litigation. It is therefore important for both employers and employees to be aware of the potential tax consequences of any amenities that are offered.

Source: “The Benefits of Working in the Office,” The New York Times, Victor Fleischer, March 6, 2013

Tax Controversy