One of your corporate clients has approached you about whether or not its employees are required to include certain benefits provided by the corporation in their income. In particular, the corporation has inquired whether the following benefits provided by the corporation to employees would be included in an employee's taxable income:
I. The employer would like to provide a holiday present to each employee at the end of December. It envisions providing gift cards, including a gift card for dinner at a local restaurant and a gift card for an electronics store. It also plans on providing each employee a $150.00 holiday bonus in a separate check.
II. The employer, which is in the business of providing commercial repair services (such as plumbing, painting, and remodeling), would like to give each employee a $500.00 credit each year that the employee can use toward any services or goods provided by the employer. For example, they could use the credit to have interior walls painted, plumbing work completed, or to purchase a new window and have it installed.
Explain to your client the general rules surrounding whether an employee must include benefits provided by the employer in income. Then, for the two proposed benefits mentioned above, explain whether the employee would have to include the amount in income or what provision or exception might apply to make the proposed benefit nontaxable. If the employer would have to make changes to the proposed benefit to render it nontaxable, explain what changes(s) would have to be made. Finally, explain what the resulting benefit would be to the employee and how much, if any, of the benefit the employee could exclude from income. Make sure to detail any significant exceptions or rules that apply to the benefit exception at issue.
The material covered in this particular essay question has been covered in the course readings, problems assigned, and/or the Discussion topics in the course. There are a few key concepts that should be addressed in any complete answer, including the following:
I. A general discussion of how employee benefits are generally included in income unless some specific exception excludes them from income, including that the taxpayer must show that all of the requirements for exclusion are satisfied before he or she is entitled to exclude the item from income;
II. A discussion of the rules concerning employee exclusions that may apply to the fact pattern given, including the requirements to be entitled to the exclusion. In this case, it would include a discussion of:
• With respect to the first fact pattern, a discussion/evaluation of the deminimis exclusion and the nature of compensation income
• With respect to the second fact pattern, a discussion/evaluation of the qualified employee discount (and, possibly, the no additional cost service exclusion to argue that it does not apply)
In grading this question, however, instructors should give due credit to discussions of concepts that are relevant to the answer, while ignoring those that are irrelevant or off topic. This means that some students may identify issues that are relevant but perhaps different than those raised by other students. Credit should be given accordingly for these answers, because students are being presented with the opportunity to show their comprehensive understanding of the material and their ability to apply it to a given set of circumstances.