Christmas was on our doorstep not too long ago and was marked by a time of giving and rejoicing. In the employment context, overseas employers with American staff may have been more inclined to be generous in gift-giving, as many of its US employees were away from their Stateside family over the holiday period. The giving and rejoicing, may be dampened, however, when the US tax implications (which will be reflected on the 2019 tax year return due later this year) are fully understood. The Internal Revenue Service (IRS), just like the Grinch, was stealing Christmas not only from overseas Americans, but from all Americans.
Generally, anything of value that an employer gives to an employee is included in the employee’s taxable income, including fringe benefits (IRC Section 61(a)(1)). There is a circumscribed exception for what is called a “de minimis” fringe benefit. This is the kind of benefit having such a small value as to make accounting for it within the meaning of detailed IRS Treasury Regulations “unreasonable” or “administratively impracticable”, after taking into account how frequently similar benefits are given by the employer to its employees. For the tax geeks, de minimis benefits are excluded under Internal Revenue Code section 132(a)(4).
Not Much is “De Minimis”
In determining whether a benefit is de minimis, the frequency with which it is given, and its value are the main criteria. An essential element of a de minimis benefit is that it is occasional or unusual in frequency. It also must not be a form of disguised compensation.
Whether an item (or service) is de minimis depends on all the facts and circumstances. In addition, if a benefit is too large to be considered de minimis, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount. The IRS has ruled previously in a particular case that items with a value exceeding US$100 could not be considered de minimis, even under unusual circumstances.
Here are some examples of de minimis fringe benefits that are excluded from income:
- Traditional holiday gifts of property with a low fair market value (for example, a Christmas ham or turkey). Note that cash is never considered a de minimis fringe. As such, the provision of any cash fringe benefit is never excludable. Furthermore, a “cash equivalent” fringe benefit (such as providing a gift certificate or charge or credit card) is also generally not excludable.
- Occasional use of company photocopy machine or secretary to help with personal typing
- Occasional theater or sporting event tickets
- Occasional soft drinks, coffee, doughnuts
- Occasional cocktail parties, group meals, or picnics for employees and their guests
- Flowers, fruit, books, provided under special circumstances (for example, due to illness, death of a family member or some other type of important event)
- Occasional meal money or transportation expense for working overtime
- Group-term life insurance for employee, spouse or dependent with face value not more than $2,000
Examples of fringe benefits that are included in income include the following:
- As mentioned, cash gifts and cash equivalents
- Season tickets to sporting, musical or theatre events
- Use of employer-owned or leased facilities (e.g., apartment, vacation home, boat, etc.)
- Sports club or country club membership
- Commuting use of an employer-provided vehicle for more than one day per month
The American Abroad
For Americans abroad who are working for a non-US employer, these issues are, for all practical purposes, often most likely ignored. Unlike US employers, the foreign employer is not reporting these fringe benefits on a Form W-2 and most Americans would never imagine the IRS and the tax laws could be such a Grinch.
Diligent tax return preparers, however, are asking their clients questions about fringe benefits. While the American abroad may not be happy to report such items on the tax return, it is certainly better than being hit with possible penalties. Remember, the value of the fringe may still be excluded using the “Foreign Earned Income Exclusion” (FEIE) (FEIE details at my blog post here). For the 2019 tax year (i.e., the tax return due in 2020) the FEIE amouns is US$105,900. For the 2020 tax year, the FEIE rises to US$107,600.
Posted January 16, 2020
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