Retirement Planning Services
You may exclude from wages the value of any retirement planning advice or information provided to your employee or his or her spouse if you
maintain a qualified retirement plan. The advice and information may concern retirement generally, and not only the employer plan. However, the
exclusion does not apply to services for tax preparation, accounting, legal, or brokerage services.
Transportation (Commuting) Benefits
This section discusses exclusion rules that apply to benefits you provide your employees for their personal transportation, such as commuting to
and from work. These rules apply to the following transportation benefits.
- De minimis transportation benefits.
- Qualified transportation benefits.
Special rules that apply to demonstrator cars and qualified nonpersonal-use vehicles are discussed under Working Condition Benefits,
De Minimis Transportation Benefits
You can exclude the value of any de minimis transportation benefit you provide to an employee from the employee's wages. A de minimis
transportation benefit is any transportation benefit you provide to an employee that has so little value (taking into account how frequently you
provide transportation to your employees) that accounting for it would be unreasonable or administratively impracticable. For example, it applies to
occasional transportation fare you give an employee because the employee is working overtime, if the benefit is reasonable and is not based on hours
For this exclusion, treat any recipient of a de minimis transportation benefit as an employee.
Qualified Transportation Benefits
This exclusion applies to the following benefits.
- A ride in a commuter highway vehicle between the employee's home and work place.
- A transit pass.
- Qualified parking.
The exclusion applies whether you provide one or a combination of these benefits to your employees.
Qualified transportation benefits can be provided directly by you or through a bona fide reimbursement arrangement. However, cash reimbursements
for transit passes qualify only if a voucher or a similar item that the employee can exchange only for a transit pass is not readily available for
direct distribution by you to your employee. A voucher is readily available for direct distribution only if an employee can obtain it from a voucher
provider that does not impose fare media charges or other restrictions that effectively prevent the employer from obtaining vouchers. See Regulation
section 1.132-9 for more information.
You can exclude qualified transportation fringe benefits from an employee's wages even if you provide them in place of pay.
Commuter highway vehicle.
A commuter highway vehicle is any highway vehicle that seats at least 6 adults (not including the driver). In addition, you must reasonably expect
that at least 80% of the vehicle mileage will be for transporting employees between their homes and work place, with employees occupying at least
one-half of the vehicle's seats (not including the driver's).
A transit pass is any pass, token, farecard, voucher, or similar item entitling a person to ride, free of charge or at a reduced rate, one of the
- Mass transit.
- In a vehicle that seats at least 6 adults (not including the driver) if a person in the business of transporting persons for pay or hire
Mass transit may be publicly or privately operated and includes bus, rail, or ferry.
Qualified parking is parking you provide to your employees on or near your business premises. It also includes parking on or near the location from
which your employees commute to work using mass transit, commuter highway vehicles, or carpools. It does not include parking at or near your
For this exclusion, treat the following individuals as employees.
- A current employee.
- A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed
under your primary direction or control.
Exception for S corporation shareholders.
Do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who directly or indirectly owns
(at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power.
Relation to other fringe benefits.
You cannot exclude a qualified transportation benefit you provide to an employee under the de minimis or working condition benefit rules. However,
if you provide a local transportation benefit other than by transit pass or commuter highway vehicle, or to a person other than an employee, you may
be able to exclude all or part of the benefit under other fringe benefit rules (de minimis, working condition, etc.).
Exclusion from wages.
You can generally exclude the value of transportation benefits you provide to an employee during 2002 from the employee's wages up to the following
- $100 per month for combined commuter highway vehicle transportation and transit passes.
- $185 per month for qualified parking.
Benefits more than the limit.
If the value of a benefit for any month is more than its limit, include in the employee's wages the amount over the limit minus any amount the
employee paid for the benefit. You cannot exclude the excess from the employee's wages as a de minimis transportation benefit.
For more information on qualified transportation benefits, including van pools, and how to determine the value of parking, see Regulation section
An educational organization can exclude the value of a qualified tuition reduction it provides to an employee from the employee's wages.
A tuition reduction for undergraduate education generally qualifies for this exclusion if it is for the education of the following individuals.
- A current employee.
- A former employee who retired or left on disability.
- A widow or widower of an individual who died while an employee.
- A widow or widower of a former employee who retired or left on disability.
- A dependent child or spouse of any individual listed in (1) through (4), above.
A tuition reduction for graduate education qualifies for this exclusion only if it is for the education of a graduate student who performs teaching
or research activities for the educational organization.
For more information on this exclusion, see Publication 520, Scholarships and Fellowships.
Working Condition Benefits
This exclusion applies to property and services you provide to an employee so that the employee can perform his or her job. It applies to the
extent the employee could deduct the cost of the property or services as a business expense or depreciation expense if he or she had paid it. The
employee must meet any substantiation requirements that apply to the deduction. Examples of working condition benefits include an employee's use of a
company car for business and job-related education provided to an employee.
This exclusion also applies to a cash payment you provide for an employee's expenses for a specific or prearranged business activity for which a
deduction is allowable to the employee. You must require the employee to verify that the payment is actually used for those expenses and to return any
unused part of the payment.
For information on deductible employee business expenses, see Unreimbursed Employee Expenses in Publication 529,
The exclusion does not apply to the following items.
- A service or property provided under a flexible spending account in which you agree to provide the employee, over a time period, a certain
level of unspecified noncash benefits with a predetermined cash value.
- A physical examination program you provide, even if mandatory.
- Any item to the extent the employee could deduct its cost as an expense for a trade or business other than your trade or business.
For this exclusion, treat the following individuals as employees.
- A current employee.
- A partner who performs services for a partnership.
- A director of your company.
- An independent contractor who performs services for you.
Vehicle allocation rules.
If you provide a car for an employee's use, the amount you can exclude as a working condition benefit is the amount that would be allowable as a
deductible business expense if the employee paid for its use. That is, if the employee uses the car for both business and personal use, the value of
the working condition benefit is the part determined to be for business use of the vehicle. See Business use of your car under
Personal Expenses in chapter 1 of Publication 535. Also, see the special rules for certain demonstrator cars and qualified nonpersonal-use
vehicles, discussed next.
However, instead of excluding the value of the working condition benefit, you can include the entire annual lease value of the car in the
employee's wages. The employee can then claim any deductible business expense for the car as an itemized deduction on his or her personal income tax
return. This option is available only if you use the lease value rule (discussed in section 3) to value the benefit.
All of the use of a demonstrator car by your full-time auto salesperson generally qualifies as a working condition benefit if the use is primarily
to facilitate the services the salesperson provided for you and there are substantial restrictions on personal use. For more 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 vehicle is a working condition benefit. A qualified nonpersonal-use vehicle is any vehicle
the employee is not likely to use more than minimally for personal purposes because of its design. Qualified nonpersonal-use vehicles generally
include all of the following vehicles.
- Clearly marked police and fire vehicles.
- Unmarked vehicles used by law enforcement officers if the use is officially authorized.
- An ambulance or hearse used for its specific purpose.
- Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds.
- Delivery trucks with seating for the driver only, or the driver plus a folding jump seat.
- A passenger bus with a capacity of at least 20 passengers used for its specific purpose.
- School buses.
- Tractors and other special purpose farm vehicles.
A pickup truck with a loaded gross vehicle weight of 14,000 pounds or less is a qualified nonpersonal use vehicle if it has been specially modified
so it is not likely to be used more than minimally for personal purposes. For example, a pickup truck qualifies if it is clearly marked with
permanently affixed decals, special painting, or other advertising associated with your trade, business, or function and meets either of the following
- It is equipped with at least one of the following items.
- A hydraulic lift gate.
- Permanent tanks or drums.
- Permanent side boards or panels that materially raise the level of the sides of the truck bed.
- Other heavy equipment (such as an electric generator, welder, boom, or crane used to tow automobiles and other vehicles).
- It is used primarily to transport a particular type of load (other than over the public highways) in a construction, manufacturing,
processing, farming, mining, drilling, timbering, or other similar operation for which it was specially designed or significantly
A van with a loaded gross vehicle weight of 14,000 pounds or less is a qualified nonpersonal use vehicle if it has been specially modified so it is
not likely to be used more than minimally for personal purposes. For example, a van qualifies if it is clearly marked with permanently affixed decals,
special painting, or other advertising associated with your trade, business, or function and has a seat for the driver only (or the driver and 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, or function.
An employee's use of outplacement services qualifies as a working condition benefit if you provide the services to the employee on the basis of
need and you get a substantial business benefit from the services distinct from the benefit you would get from the payment of additional wages.
Substantial business benefits include promoting a positive business image, maintaining employee morale, and avoiding wrongful termination suits.
Outplacement services do not qualify as a working condition benefit if the employee can choose to receive cash or taxable benefits in place of the
services. If you maintain a severance plan and permit employees to get outplacement services with reduced severance pay, include in the employee's
wages the difference between the unreduced severance and the reduced severance payments.
Exclusion from wages.
You can generally exclude the value of a working condition benefit you provide to an employee from the employee's wages.
Exception for independent contractors.
You cannot exclude the value of parking or the use of consumer goods you provide in a product testing program from the compensation you pay to an
independent contractor who performs services for you.
Exception for company directors.
You cannot exclude the value of the use of consumer goods you provide in a product testing program from the compensation you pay to a director.
3. Fringe Benefit Valuation Rules
This section discusses the rules you must use to determine the value of a fringe benefit you provide to an employee. You must determine the value
of any benefit you cannot exclude under the rules in section 2 or for which the amount you can exclude is limited. See Including taxable benefits
in pay under Are Fringe Benefits Taxable? in section 1.
In most cases, you must use the general valuation rule to value a fringe benefit. However, you may be able to use a special valuation rule to
determine the value of certain benefits.
This section does not discuss the special valuation rule used to value meals provided at an employer-operated eating facility for employees. These
rules are discussed in section 1.61-21(j) of the regulations. This section also does not discuss the special valuation rules used to value the use of
aircraft. These rules are discussed in sections 1.61-21(g) and (h) of the regulations.
This section discusses the general valuation rule and the following special valuation rules for employee transportation benefits.
- Cents-per-mile rule
- Commuting rule
- Lease value rule
- Unsafe conditions commuting rule
General Valuation Rule
You must use the general valuation rule to determine the value of most fringe benefits. Under this rule, the value of a fringe benefit is its fair
Fair market value.
The fair market value of a fringe benefit is the amount an employee would have to pay a third party in an arm's-length transaction to buy or lease
the benefit. Determine this amount on the basis of all the facts and circumstances.
Neither the amount the employee considers to be the value of the fringe benefit nor the cost you incur to provide the benefit determines its fair
In general, the fair market value of an employer-provided vehicle is the amount the employee would have to pay a third party to lease the same or a
similar vehicle on the same or comparable terms in the geographic area where the employee uses the vehicle. A comparable lease term would be the
amount of time the vehicle is available for the employee's use, such as a 1-year period.
Do not determine the fair market value by multiplying a cents-per-mile rate times the number of miles driven unless the employee can prove the
vehicle could have been leased on a cents-per-mile basis. See Cents-Per-Mile Rule, next.
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