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J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line by Barbara Weltman

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Nonstatutory Fringe Benefits

There is a special category of fringe benefits that you may provide to your employees on a tax-deductible basis but which your employees need not include in their income. These are referred to as nonstatutory fringe benefits because there is no separate section in the Internal Revenue Code for each particular benefit—they are all covered in the same section. Nonstatutory fringe benefits are not only excludable from the employee’s gross income; they are also not subject to employment taxes. In general, these benefits must be provided on a nondiscriminatory basis. Benefits cannot be provided solely to owners and highly paid employees and not to rank-and-file employees. Nonstatutory fringe benefits include:

  • No-additional-cost service. You need not include in your employee’s gross income the value of a service you offer to customers in the ordinary course of the business in which your employee works (e.g., if you run a ferry line and allow employees to ride for free on scheduled runs). In the case of no-additional-cost service, you generally do not have any expense to deduct by virtue of providing the benefit to the employee. You have already deducted costs related to providing the service.
  • Qualified employee discount. You need not include in your employee’s gross income a price reduction you give on certain property or services you offer to customers in the ordinary course of your business in which the employee performs services (e.g., if you own a clothing ...

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