Let’s say your company has a box suite at Turner Field, which you use to treat your wife and kids to a Braves game. Since no business is occurring, this is considered personal use. If the suite is an executive perk, everything above the normal price of a ticket to the game could become taxable income for you, if use of the box suite is exclusively for executives.
A fringe benefit provided to an employee is considered taxable income for the employee unless the tax law specifically excludes it. Excludable fringe benefits often include employee discounts, no-additional-cost services, commuting benefits, qualified retirement planning services, and gyms or athletic facilities. Employees also may receive “de minimis fringe” benefits, considered to be “among the small things.” These types of items are the coffee, soft drinks, and the occasional box of doughnuts in the break room, etc. These benefits are the ones taken for granted by most employees.
Fringe benefits become more complicated when you get into working condition fringe benefits, such as an employee’s business and personal use of a company car, an employer-provided cell phone or excessive reimbursements. Generally, a benefit is tax-free to an employee to the extent the employee would be able to deduct the cost of the property or services as a business or depreciation expense if he or she had paid for it. Let’s say your employer provides you with a computer and specialized software so that you may work from home. If the equipment is used 100 percent for work, then the benefit should be tax-free to you. However if you use the computer for personal use 50 percent of the time, then 50 percent of the cost of the computer should be included in your W-2 by your employer.
Likewise, if your company provides you an excessive reimbursement for tuition, travel expenses or mileage driven on your own car, the excess should be considered income to you. For example, if you are given $2,000 for education assistance, it would be excludable because the IRS allows employers to provide up $5,250 under an educational assistance program. However if you used $1,000 of it to cover non-job-related education, you should be taxed on this benefit.
The IRS also says that any benefit or payment provided to executives that isn’t provided to other employees may be subject to taxation, such as an executive loan. While the Sarbanes-Oxley Act prohibits publicly traded companies from making personal loans to executive officers and directors, private companies are generally allowed to make below-market loans to executives. Such loans may be provided interest free or at a rate below the applicable federal rate set by the IRS.
Basically, if you receive a below-market rate loan, the IRS deems the foregone loan interest as additional compensation to you and includible in gross income and wages for employment tax purposes. When using an executive perk, you need to understand what part your company is liable for and what part will be reported on your W-2 form.
William G. Lako Jr., CFP, is an executive in residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Lako is a certified financial planner. The Marietta Daily Journal will periodically publish columns from KSU business faculty.