Saturday, November 24, 2018
Hey Fletch … We are thinking of offering all staff who work 32 hours a week or more discounts to church retreats and functions for which there is a charge. My question is, does the exclusion outlined in IRS 15b apply? It says: “Employee Discounts—This exclusion applies to a price reduction you give your employee on property or services you offer to customers in the ordinary course of the line of business in which the employee performs substantial services. However, it doesn’t apply to discounts on real property or discounts on personal property of a kind commonly held for investment (such as stocks or bonds).”
DRF—You cited IRS Publication 15-B, “Employer’s Tax Guide to Fringe Benefits, For use in 2018.” That publication also mentions “Employee Stock Options.” God takes care of stock options but they are only paid in heaven. The IRS does not have jurisdiction there! Humor, trace.
Publication 15-B says, “You can generally exclude the value of an employee discount you provide an employee from the employee’s wages, up to the following limits: For a discount on services, 20% of the price you charge nonemployee customers for the service.”
There are some caveats to it, and this one may apply to your staff executive leadership: “You can’t exclude from the wages of a highly compensated employee any part of the value of a discount that isn’t available on the same terms to one of the following groups.”
If you are giving a discount of 20% or less to any employee, it is non-taxable. If the discount is more than 20%, then the phrase that the IRS uses of “substantial services,” will need clarification from a tax expert. Let me reach out to non-profit CPA Mike Batts of Batts Morrison Wales & Lee. Mike is a nationally-noted expert; let’s get some clarification on that phrase.
Mike Batts—The nontaxable fringe benefit rule that your reader is referring to is the “qualified employee discount” exclusion found in Internal Revenue Code Section 132(a)(2). Under this rule, an employer can generally exclude from an employee’s wages the value of an employee discount of up to 20% of the price charged to nonemployee customers for the same service.
An employee discount provided to “highly compensated” employees is nontaxable only if the discount program does not discriminate in favor of highly compensated employees. In other words, the discount given to highly compensated employees should not be more favorable than that given to other employees. For this purpose, the term “highly compensated employee” generally refers to individuals whose total compensation exceeds $120,000. This is the amount applicable to 2018 and it is indexed annually for inflation. Note that for this purpose, the compensation used in determining whether an individual is highly compensated is the compensation of the prior year. The definition of “compensation” varies depending on the circumstances, but it generally does not include a validly designated clergy housing allowance within allowable limits.
As far as the “substantial services” question, unfortunately, neither the Internal Revenue Code nor the related Regulations provide a definition or “bright-line” test for what constitutes “substantial services.” However, the Regulations do indicate that an employee who performs substantial services that directly benefit more than one line of business of an employer is treated as performing substantial services in all such lines of business. In our experience, we believe it is likely that all of the ministry activities of a traditional church taken together would comprise a single line of business for purposes of this fringe benefit rule. In practicality, churches rarely consider their employees to work in separate lines of business as that concept would be applied to this issue.