The concept of de minimis is important in employee benefits, capital gains taxes, and other business tax areas. A small benefit might not be subject to income tax. The amount can vary depending on circumstances.
What Does De Minimis Mean for Employee Benefits?
The Internal Revenue Service says a de minimis benefit is “one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.” Many benefits provided by employers are taxable as income to the employees, but a de minimis benefit is not. From a tax standpoint, a de minimis benefit is a small amount of employee compensation, and Internal Revenue Code section 132(a)(4) states that these small amounts are not subject to taxation. They’re not worth the time and effort it would take to account for them.
Examples of De Minimis Employee Benefits
Minimal or occasional employee benefits are considered de minimis. In some cases, it’s because the amount is small, such as the holiday turkey. Other benefits are considered de minimis because it’s simply too difficult to sort out employee personal use from business use, such as the office copier. Some other examples of de minimis awards that can be excluded from taxes for employees:
Flowers, plaques, coffee mugs, or other small gifts (other than cash) for special occasions. Occasional award dinners or holiday dinners for employees and guests. Coffee and donuts at staff meetings or occasional meals provided to employees who work overtime. Occasional tickets to sporting events or theater, such as the use of the company box at a basketball game. Occasional personal use of the office copying machine if you can show that it’s being used at least 85% of the time for business purposes. Group term life insurance under $2,000. Occasional reimbursement for transportation costs. Holiday gifts, provided that they meet the other de minimis benefits qualifications.
What Is Not Considered a De Minimis Benefit
The following are never de minimis:
Cash, including cash equivalents like gift cards except for infrequent meal or transportation money for overtime work. Season tickets to theatres or sporting events. Use of the employer’s apartment, vacation home, boat, or airplane. Membership in a country club or athletic facility.
De Minimis Benefits and Cell Phones
The IRS considers employer-provided cell phones de minimis if they’re not part of the company’s compensation to the employee and if they’re provided for “substantial business reasons.” Some examples include:
The employer needs to be able to contact the employee at all times for work-related emergencies. For example, the employee may work in health care or as a personal assistant.The employee has an employer-provided phone because they need to be able to talk to clients when they are out of the office, because clients expect or need them to be accessible. For example, the employee may work as a lawyer.The employee must be able to contact clients or colleagues outside of their normal working hours or when their office is closed. For example, they may regularly talk to colleagues or clients in another time zone.
Cell phones are not considered a de minimis benefit if the phone is provided:
To promote the goodwill of the employee.To attract a prospective employee.As additional compensation to an employee.
Records to Prove De Minimis Benefits
It’s always difficult to prove a negative. Keep detailed records of times when you provide small benefits to employees, explaining the business purpose, as well as the date and the time. Showing that you always keep good records will help you defend de minimis use in the event of a tax audit.
De Minimis in Other Tax and Legal Areas
The 2015 PATH Act provides protection against fines and penalties for business taxpayers for de minimis errors under $100 on information returns. On Form 1099-S, proceeds from Real Estate Transactions, a transfer of less than $600 is considered de minimis. De minimis limits are considered in capital gains tax on the purchase of discounted municipal bonds. A discount of less than a quarter of a point per year, it is taxed as a capital gain instead of as ordinary income. De minimis is used in copyright law when determining whether a work is within the limits of fair use. A small or trivial amount of copyrighted work can be used without permission. Whether or not something is considered de minimis varies by case.
