By Paul N. Gada, CCH Financial Planning Toolkit Staff Writer
It seems the IRS was among the 38.8 million viewers who tuned in to the Academy Awards on March 5, 2006. The IRS, however, was watching strictly for business, not pleasure.
In a late release on its website on March 3, IRS Commissioner Mark W. Everson issued a statement commenting on the taxability of "goodie bags" given to celebrity attendees of the awards presentation. Everson wished the nominees good luck, but reminded recipients that "the six-figure goodie bags" will qualify as taxable income that must be reported, suggesting that stars "walk the line" with respect to reporting this income.
"It's important to keep in mind that movie stars face the same tax obligations as ordinary Americans," Everson said.
The IRS observed that news reports regarding the "official" Oscar gifts that will be given to stars estimate their value at over $100,000. "This has become big business for companies promoting their products. These things aren't given without pride and prejudice," quipped Everson in his statement.
Although most of us "ordinary Americans" can only dream of getting such goodie bags, receiving scaled down versions of such gifts in the employment setting is very common. Since it’s so close to the tax filing deadline, this is a perfect time to review the basics of this topic.
The value of property acquired by gift (as well as by bequest, devise, or inheritance) is generally excluded from gross income. To be considered a gift, the payment must proceed from a detached and disinterested generosity, out of affection, respect, admiration, charity or similar impulse. If a transfer of property or payment is made in exchange for services or other valuable consideration, there is no gift regardless of the declared intent of the transferor.
The intent of the giver, however, is still the key factor in any such situation. In the Oscar presenter scenario, the "gifts" are taxable mainly because they serve as enticement for celebrities to appear on stage, and not for the noble reasons listed above.
Similarly, most amounts transferred by an employer to an employee do not qualify as gifts and are not excludable from income. The value of all gifts or awards made to employees by an employer for services rendered is generally treated as additional compensation and subject to federal income tax, federal income tax withholding, and FICA and FUTAtaxes. As always, though, there is an exception to this rule.
Gifts (not cash payments) of nominal value may be treated as de minimis fringe benefits. In such case, the value will be exempt from federal employment taxes.
A gift is treated as a de minimis fringe benefit when it meets all the following requirements:
- it has a nominal value (no dollar threshold is specified);
- gifts are made infrequently;
- accounting for the gift would be impractical; and
- the gift is furnished for the purpose of promoting health, good will, contentment, or efficiency of employees (i.e., not disguised compensation).
The following are examples of benefits that are excluded from taxes as de minimus fringes:
- typing of personal letters by a company secretary;
- occasional personal use of the company copying machine;
- occasional parties or picnics for employees;
- occasional supper money or taxi fare due to overtime work;
- traditional holiday gifts of property (not cash) with a small fair market value (e.g., Christmas hams and turkeys);
- tickets that are occasionally given out for entertainment events such as plays or baseball games;
- coffee and doughnuts furnished to employees;
- local telephone calls; and
- flowers, fruit, books, or similar property provided to employees under special circumstances such as illness, outstanding performance, or family crisis.
As you can see, the exception to the general rule about employment-related gifts being taxable is very narrow. Examples of benefits that are not excludable from taxes as de minimis fringes are:
- season tickets to sporting or theatrical events;
- gift certificates that are redeemable for cash;
- the commuting use of an employer-provided car more than one day a month;
- membership in a private country club or athletic facility; and
- use of employer-owned or leased facilities (such as an apartment, hunting lodge, or boat) for a weekend.
Knowing these basic rules should help you easily hustle and flow through this tax season. More importantly, avoiding mistakes on your tax return helps prevent unwanted attention from the IRS, which can be more uncomfortable than a trip to Brokeback Mountain.
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Added to the news on March 20, 2006.
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