Exclusion of Certain Fringe Benefits Special rules allow you to exclude certain fringe benefits youprovide to an employee from the employee's wages. You can excludeunder these rules all of the following fringe benefits. A de minimis (minimal) fringe. A no-additional-cost service. An on-premises athletic facility. A qualified employee discount. A qualified moving expense reimbursement. A qualified transportation fringe. A working condition fringe. TaxTip: These are not the only employee benefits you can exclude from anemployee's wages. For example, you can also exclude certain meals andlodging you provide for your convenience and certain benefits youprovide through employee benefit programs. For more information, seechapters 3and 5. Except for the exclusions for de minimis fringe benefits andqualified moving expense reimbursements, the above exclusions do notapply if the tax treatment of the fringe benefit is provided byanother tax rule. For example, these exclusions do not apply toemployer-provided dependent care assistance or tuition reductions, thetax treatments of which are covered by other rules. However, ifanother tax rule excludes a benefit from wages and the exclusion is alimited amount of the benefit's cost, an exclusion under the fringebenefit rules may apply to the rest of the cost. The value of fringe benefits you properly exclude from anemployee's wages is not subject to income tax withholding or socialsecurity, Medicare, or federal unemployment (FUTA) tax. You do notreport it as wages on Form W-2. Nondiscrimination rules.You cannot exclude a no-additional-cost service, a qualifiedemployee discount, or a meal provided at an employer-operated eatingfacility for employees from the wages of a highly compensated employeeunless the benefit is available on the same terms to: All employees, or A group of employees defined under a reasonableclassification you set up that does not favor highly compensatedemployees. Meals provided at an employer-operated eating facility arediscussed under De Minimis (Minimal) Fringe, next. If any benefit is discriminatory, include the total value of thebenefit, not only the value of the discriminatory part, in the wagesof your highly compensated employees. Highly compensated employee.A highly compensated employee for 2000 is an employee who: Was a 5% owner at any time during the year or thepreceding year, or Received more than $85,000 in pay for the precedingyear. When you apply requirement (2), you may choose to include onlyemployees who were also in the top 20% of employees when rankedby pay for the preceding year. De Minimis (Minimal) Fringe An employee's wages do not include the value of a de minimis fringebenefit. This benefit is any property or service you provide to anemployee that has so little value (taking into account how frequentlyyou provide similar benefits to your employees) that accounting for itwould be unreasonable or administratively impracticable. Cash, nomatter how little, is never excludable as a de minimis fringe, exceptfor occasional meal money or transportation fare as discussed next. Examples of de minimis fringes include the following. Occasional typing of personal letters by a companysecretary. Occasional personal use of a company copying machine, if yousufficiently control its use. Occasional parties or picnics for employees and theirguests. Occasional meals, meal money, or local transportation fare,not based on hours worked, provided to an employee because theemployee is working overtime and, for meals and meal money, providedto enable the employee to work overtime. Holiday gifts, other than cash, with a low FMV. Occasional tickets for entertainment events. Coffee, doughnuts, or soft drinks furnished toemployees. Group-term life insurance payable on the death of anemployee's spouse or dependent if the face amount is not more than$2,000. TaxTip: If food or beverages you furnish employees qualify as a de minimisfringe benefit, you can deduct their full cost. The 50% limit ondeductions for the cost of meals does not apply. See Deductionlimit on meals under Meals and Lodging in chapter 2. Employer-operated eating facility.The value of meals you provide to employees at an eating facilityoperated by you is a de minimis fringe benefit only if the annualrevenue from the facility equals or exceeds the direct operating costsof the facility. For the nondiscrimination requirements, seeNondiscrimination rules, earlier. For definitions of anemployer-operated eating facility and direct operating costs, seeEmployer-Operated Eating Facility Rule, earlier. Meals furnished for your convenience.If the value of the meals furnished at your eating facility foremployees can be excluded from the employees' wages under the rulesexplained in chapter 3,your revenue from the meals is considered toequal the facility's direct operating costs for them. No-Additional-Cost Service If you provide an employee with the same service you offer tocustomers in the ordinary course of the line of business inwhich the employee performs substantial services, this service may bea no-additional-cost service. Do not include the value of the servicein the employee's wages if you do not incur any substantial additionalcosts to provide the service to the employee. (But seeNondiscrimination rules, earlier, if the employee is highlycompensated.) To determine additional costs include lost revenue, butdo not reduce the costs you incur by any amount the employee paid forthis service. Generally, no-additional-cost services are excess capacityservices, such as airline, bus, or train tickets; hotel rooms; ortelephone services provided free or at a reduced price to employeesworking in those lines of business. Generally, an employer's line of business is determinedby the Enterprise Standard Industrial Classification Manual (ESICManual) prepared by the Statistical Policy Division of the U.S. Officeof Management and Budget. For more information, see section1.132-4 of the regulations. Reciprocal agreements.Employees can exclude the value of a no-additional-cost serviceprovided by an unrelated employer if all the following tests apply. The service is the same type of service generally providedto customers in both the line of business in which the employee worksand the line of business in which the service is provided. You and the employer providing the service have a writtenreciprocal agreement under which a group of employees of eachemployer, all of whom perform substantial services in the same line ofbusiness, may receive no-additional-cost services from the otheremployer. Neither you nor the other employer incurs any substantialadditional cost (including lost revenue) either in providing theservice or because of the written agreement. Employee.For this fringe benefit, "employee" includes any of thefollowing persons. An individual currently employed by you. An individual who stopped working for you as an employeebecause of retirement or disability. A surviving spouse of an individual who died while workingfor you as an employee or who stopped working for you as an employeebecause of retirement or disability. Partner who performs services for a partnership. Treat services you provide to the spouse or dependent child of anemployee as provided to the employee. For this fringe benefit,"dependent child" means any son, stepson, daughter, orstepdaughter who is a dependent of the employee, or both of whoseparents have died and who has not reached age 25. Treat a child ofdivorced parents as a dependent of both parents. Treat any use of air transportation by the parent of an employee asuse by the employee. This rule does not apply to use by the parent ofa person considered an employee because of item (3) above. On-PremisesAthletic Facilities You can exclude from an employee's wages the value of anon-premises gym or other athletic facility you provide and operate ifsubstantially all use during the calendar year is by employees, theirspouses, and their dependent children. For this purpose, the term "employee" includes the sameindividuals included as employees for no-additional-cost services(described earlier). The exclusion does not apply if you make access to the facilityavailable to the general public through the sale of memberships, therental of the facility, or a similar arrangement. The exclusion alsodoes not apply to any athletic facility that is for residential use.For example, a resort with athletic facilities would not qualify. QualifiedEmployee Discount Do not include in an employee's wages the value of a qualifiedemployee discount. A qualified employee discount is a price reductionyou give an employee on certain property or services you offer tocustomers in the ordinary course of the line of business in which theemployee performs substantial services. For the rules on line ofbusiness, see No-Additional-Cost Service, earlier. If theemployee is highly compensated, see Nondiscrimination rules,earlier. However, a discount on real property (such as a building or land)or on personal property of a kind commonly held for investment (suchas stocks or bonds) is not a qualified employee discount. Theexclusion does not apply where there is a reciprocal agreement underwhich another employer provides the discount. A qualified employeediscount also does not include any discount to the extent it is morethan the following amount. For a discount on property, your gross profitpercentage times the price you charge customers for theproperty. For a discount on services, 20% of the price you chargecustomers for the service. Determine your gross profit percentage based on allproperty you offer to customers (including employee customers) in theordinary course of your line of business and your experience duringthe tax year immediately before the tax year in which the discount isavailable. To figure your gross profit percentage, subtract the totalcost of the property from the total sales price of the property anddivide the result by the total sales price of the property. The term "employee" includes the same individuals listedearlier under No-Additional-Cost Service. For special rulesconcerning employees of a leased section of a department store, seesection 1.132-3(d) of the regulations. Qualified MovingExpense Reimbursements You can exclude from an employee's wages any qualified movingexpense reimbursement. This is any amount you give the employee,directly or indirectly (including services furnished in kind), as apayment for, or a reimbursement of, expenses that would be deductibleas moving expenses if your employee paid or incurred them. You shouldmake the reimbursements under rules similar to those described inchapter 16for reimbursements of expenses for travel, meals, andentertainment under accountable plans. Deductible moving expenses.Deductible moving expenses include only the reasonable expenses of: Moving household goods and personal effects from the formerhome to the new home, and Traveling (including lodging) from the former home to thenew home. Caution: Deductible moving expenses do not include any expenses for meals.   For more information on deductible moving expenses, see Publication 521, Moving Expenses. Nonqualified reimbursements.Include any reimbursements for moving expenses that are notqualified moving expense reimbursements in the employee's wages. Thisincludes any payment for, or reimbursement of, expenses the employeededucted in a prior year. Where to report reimbursements.Report any qualified moving expense reimbursements you paiddirectly to an employee in 1999 in box 13 of the employee's 1999 FormW-2. Use code "P" to identify the reimbursements. Do notreport any qualified moving expense reimbursements you paid to a thirdparty on behalf of the employee or services that you furnished in kindto an employee. Include any nonqualified moving expense reimbursements with youremployee's wages in box 1. QualifiedTransportation Fringe You can exclude qualified transportation fringe benefits from thewages of employees, up to certain limits. The following benefits,which you can provide in any combination at the same time to anemployee, are qualified transportation fringe benefits. A ride in a commuter highway vehicle between the employee'shome and work place. A transit pass. Qualified parking. Amounts you give to an employee for these expenses under a bonafide reimbursement arrangement are also excludable. Cashreimbursements for transit passes qualify only if a voucher or asimilar item that the employee can exchange only for a transit pass isnot readily available for direct distribution by you to your employee. Benefit provided in place of pay.You can exclude qualified transportation fringe benefits from anemployee's wages even if you provide them in place of pay. Employee.You can provide qualified transportation fringe benefits only toemployees. The definition of employee includes common-law employeesand other statutory employees, such as officers of corporations.Self-employed individuals, including partners, 2-percent shareholdersin S corporations, sole proprietors, and other independent contractorsare not employees for purposes of this fringe benefit. Relation to other fringe benefits.You cannot exclude a qualified transportation fringe benefit underthe de minimis or working condition fringe benefit rules. However, ifyou provide a local transportation benefit other than by transit passor commuter highway vehicle, or to a person other than an employee asdefined earlier, you may be able to exclude all or part of the benefitunder other fringe benefit rules (de minimis, working condition,etc.). Commuter highway vehicle.A commuter highway vehicle is any highway vehicle that seats atleast 6 adults (not including the driver). In addition, you mustreasonably expect that at least 80% of the vehicle mileage will be fortransporting employees between their homes and work place, with youremployees occupying at least one-half of the vehicle's seats (notincluding the driver's). Transit pass.A transit pass is any pass, token, farecard, voucher, or similaritem entitling a person, free of charge or at a reduced rate, to ride: Mass transit, or In a vehicle that seats at least 6 adults (not including thedriver) if a person in the business of transporting persons for pay orhire operates it. Mass transit may be publicly or privately operated and includesbus, rail, or ferry. Qualified parking.Qualified parking is parking you provide to your employees on ornear your business premises. It also includes parking on or near thelocation from which your employees commute to work using mass transit,commuter highway vehicles, or carpools. It does not include parking ator near your employee's home. Exclusion Limits For 2000, you may exclude from the wages of each employee up to: $65 per month for combined commuter highway vehicletransportation and transit passes, and $175 per month for qualified parking. Excess benefits taxable.If, for any month, the fair market value of a benefit is more thanits limit, include in the employee's wages only the amount over thelimit, minus any amount paid for the benefit by the employee. Example 1.Each month, you provide a transit pass valued at $70 to youremployee, Tom Travis. He does not pay you for any part of the pass.Because the value of the transit pass exceeds the limit, for eachmonth you provide this pass you must include $5 in his wages forincome and employment tax purposes. Example 2.Each month, you provide qualified parking valued at $180 to TravisRamon. He does not pay you for any part of the parking. Because thevalue of the parking exceeds the limit, for each month you providethis parking you must include $5 in his wages for income andemployment tax purposes. Example 3.You provide qualified parking with a fair market value of $200 permonth to your employees, but you charge the employees $25 per month.The value of the parking exceeds the limit by $25. You reduce thatexcess benefit by the amount your employees paid ($25). Do not includeany amount in your employees' wages. More Information For more information on qualified transportation fringe benefits,including van pools, and how to determine the value of parking, seeNotice 94-3 in Cumulative Bulletin 1994-1. Working Condition Fringe You can exclude from an employee's wages (as a working conditionfringe benefit) the value of property and services you provide if theemployee could deduct them as a trade or business or depreciationexpense if he or she paid for them. For this fringe benefit, employeeincludes any of the followingpersons. An individual currently employed by you. A partner who performs services for a partnership. A director of your company. An independent contractor who performs services foryou. However, do not exclude from the compensation you pay to anindependent contractor who performs services for you the value ofparking or the use of consumer goods that you provide in a producttesting program. Also, do not exclude from the compensation you pay toa director the value of the use of consumer goods you provide in aproduct testing program. Vehicle-allocation rules.Generally, for an employer-provided vehicle, the amount you canexclude as a working condition fringe is the amount that would beallowable as a deductible business expense if paid by the employee.That is, if the employee uses the car for business, as well as forpersonal use, the value of the working condition fringe is the portiondetermined to be for business use of the vehicle. See Businessuse of your car under Personal Expenses in chapter 1.Also, see the special rules for certain demonstrator cars andqualified nonpersonal-use vehicles, discussed later. However, instead of excluding the value of the working conditionfringe related to the deductible car expense, you may include theentire annual lease value in an employee recipient's wages. Theemployee can then claim any deductible business car expense as anitemized deduction on his or her personal income tax return. Thisoption is available only if you use the automobile lease rule(discussed under Special Valuation Rules, earlier) to valuethe fringe benefit. Educational assistance.If you pay the cost of an employee's education, you may be able toexclude the cost from the employee's wages under the tax rules thatapply to employer-provided educational assistance programs. Costs youcannot exclude under those rules may be excluded only if they qualifyas a working condition fringe. To qualify as a working conditionfringe, the cost of the education must be a job-related expense thatwould be deductible by the employee if he or she paid it. For moreinformation on educational assistance programs, see chapter 5.Formore information on deductible education expenses, see Publication 508,Tax Benefits for Work-Related Education. Outplacement services.You can exclude from an employee's wages, as a working conditionfringe, the value of outplacement services provided to the employee onthe basis of need if you get a substantial business benefit from theservices distinct from the benefit you would get from the payment ofadditional wages. Substantial business benefits include promoting apositive business image, maintaining employee morale, and avoidingwrongful termination suits. You cannot exclude the value of services that do not qualify as aworking condition fringe because the employee can choose to receivecash or taxable benefits in place of the services. If you maintain aseverance plan and permit employees to get outplacement services withreduced severance pay, include in the employee's wages the differencebetween the unreduced severance and the reduced severance payments. Demonstrator cars.All of the use of a demonstrator car by your full-time autosalesperson generally qualifies as a working condition fringe if theuse is primarily to facilitate the services the salesperson providedfor you and there are substantial restrictions on personal use. Formore information and the definition of "full-time auto salesperson,"see section 1.132-5(o) of the regulations. Qualified Nonpersonal-Use Vehicles All of an employee's use of a qualified nonpersonal-use vehiclequalifies as a working condition fringe. You can exclude the value ofthat use from the employee's wages. A qualified nonpersonal-usevehicle is any vehicle the employee is not likely to use more thanminimally for personal purposes because of its design. Qualifiednonpersonal-use vehicles include all of the following vehicles. Clearly marked police and fire vehicles. Unmarked vehicles used by law enforcement officers if theuse is officially authorized. An ambulance or hearse used for its specific purpose. Any vehicle designed to carry cargo with a loaded grossvehicle weight over 14,000 pounds. Delivery trucks with seating for the driver only, or thedriver plus a folding jump seat. A passenger bus with a capacity of at least 20 passengersused for its specific purpose. School buses. Tractors and other special purpose farm vehicles. Clearly marked police or fire vehicles.A police or fire vehicle is a vehicle, owned or leased by agovernmental unit (or any of its agencies or instrumentalities), thata police officer or fire fighter who is always on call must use forcommuting. The governmental unit must prohibit any personal use (otherthan commuting) of the vehicle outside the limit of the policeofficer's arrest powers or the fire fighter's obligation to respond toan emergency. A police or fire vehicle is clearly marked if, through apainted symbol or words, it is easy to see the vehicle is a police orfire vehicle. A marking on a license plate is not a clear marking forthis purpose. Unmarked law enforcement vehicles.The governmental agency or department that owns or leases thevehicle and employs the officer must authorize any personal use of anunmarked law enforcement vehicle. The personal use must be necessaryto help enforce the law, such as being able to report directly fromhome to a stakeout site or to an emergency. Use for vacation orrecreation trips cannot qualify as an authorized use. Law enforcement officer.A law enforcement officer is a full-time employee of a governmentalunit that is responsible for preventing or investigating crimesinvolving injury to persons or property (including catching ordetaining persons for these crimes). The law must allow the employeeto take all of the following actions. Carry firearms. Execute search warrants. Make arrests (other than citizen's arrests). The employee must regularly carry firearms except when workingundercover. A law enforcement officer includes an arson investigatorif the investigator meets these requirements. Trucks and vans.A pickup truck or van is not a qualified nonpersonal-use vehicleunless specially modified so it is not likely to be used more thanminimally for personal purposes. The following are guidelines that apickup truck or van can meet to be a qualified nonpersonal-usevehicle. Even if these guidelines are not met, the vehicle may stillqualify, based upon the facts. In that case, contact the IRS forfurther guidance. Pickup truck.A pickup truck with a loaded gross vehicle weight not over 14,000pounds qualifies if clearly marked with permanently affixed decals,special painting, or other advertising associated with your trade,business, or function. It must meet either of the followingrequirements. Be equipped with at least one of the following items. Hydraulic lift gate. Permanent tanks or drums. Permanent side boards or panels that materially raise thelevel of the sides of the truck bed. Other heavy equipment (such as an electric generator,welder, boom, or crane used to tow automobiles and othervehicles). Be used primarily to transport a particular type of load(other than over the public highways) in a construction,manufacturing, processing, farming, mining, drilling, timbering, orother similar operation for which it was specially designed orsignificantly modified. Van.A van with a loaded gross vehicle weight not over 14,000 poundsqualifies if clearly marked with permanently affixed decals, specialpainting, or other advertising associated with your trade, business,or function. It must have a seat for the driver only, or the driverand one other person, and either of the following items. Permanent shelving that fills most of the cargo area. An open cargo area and the van always carries merchandise,material, or equipment used in your trade, business, orfunction. Items Not Excludable The following are examples of items you cannot exclude from anemployee's wages as working condition fringe benefits. A service or property offered through a flexible spendingaccount. A flexible spending account is an agreement that givesemployees over a time period a certain amount of unspecified noncashbenefits with a predetermined cash value. Any item for which the employee does not have the necessarysubstantiation to deduct as a trade, business, or depreciationexpense. Expenses the employee can deduct under sections of theInternal Revenue Code other than for trade or business expenses ordepreciation. A physical examination program, even if mandatory for someor all employees. A cash payment you made to the employee unless you requirethe employee to do all of the following. Use the money for expenses for a specific or prearrangedactivity that are deductible as trade, business, or depreciationexpenses. Verify that he or she used the money for theseexpenses. Return any unused money to you.