Baylor University
Tax & Compliance Department
Financial Services

Working Condition Fringes

A working condition fringe is any property or service provided to an employee to the extent that if the employee had paid for the fringe, the payment would have been deductible under IRC §§ 162 or 167 as a business expense. Under these sections, the expense must be an ordinary and necessary business expense and must be properly substantiated to be deductible. To be properly substantiated, the employee must provide the necessary documentation under §162 or §274(d).

Under §162, if the employee is required to report to his employer, the IRS states such shall be done through an expense account or other written statement showing the business nature and amount of all the employee’s expenses broken down into different categories such as travel, entertainment, etc. Under §274(d), which only applies to certain categories of items (i.e., travel, entertainment, listed property), the following must be substantiated: the amount of each expense, the date and time of each expense, the location of the expense, the business reason for the expense and the business relationship pertaining to the expense. If this documentation requirement is not satisfied, the employee will be denied the benefit exclusion.

This exclusion is available only to employees, not their families; however, volunteers who provide services for the university can use this exclusion. Any cash payments by the university to an employee are not working condition fringes unless the employee is required to use the money for a specific or pre-arranged business expense, verify the money was actually used for that expense and return to the university any money not used.

The following are classified as working condition fringes:


The value of the business use of a University-provided automobile by an employee is excludable as a working condition fringe benefit. The employee must maintain an accurate mileage log which includes a written record of the miles driven (odometer reading) and business purpose for the usage. Any personal use of the vehicle must be included in the employee’s gross income unless the use is incidental, in which case the use is a de minimis fringe benefit. Examples of incidental use include stopping for lunch or running the occasional personal errand. However, commuting from the employee’s personal residence to work does not qualify as incidental use. (Top)

Airplanes/Chartered Flight

The initial question concerning employee flights is whether the purpose of the flight was for business reasons or for personal reasons. The second question is what type of flight was used – University provided/charter flight or a commercial flight. If a University-provided or charter flight was used, the third question to resolve is whether control employees were present.

A flight taken for business reasons, the cost of which would be deductible by the employee if paid for personally, is excluded as a working condition fringe benefit. Examples of such flights include travel between different University locations, attendance at official events, recruitment activities, etc. In addition, if the plane is a University-provided plane, and 50% or more of the regular passenger seating capacity of the plane is filled with employees flying for substantiated business reasons, the value of the flight will not be included in the income of those employees who are flying for personal reasons. This also applies to spouses and dependent children, surviving spouses, and retired/disabled employees.

Any flights taken for personal purposes by an employee must be included in his/her income. In addition, the employee’s income will include the value of any flight for which relatives or friends accompanied the employee for personal purposes. If the flight was on a University-provided or charter aircraft, the flight value is either the cost of an arm’s length charter of the same or a comparable plane for that period for the same or a comparable flight, or determined by a formula detailed in Treasury Regulation 1.61-21(g). This formula must be elected by the employer. Regulation 1.61-21(g) states the fair market value of flight on employer-provided aircraft can be determined by multiplying the Standard Industry Fare Level by the appropriate aircraft multiple and then adding the applicable terminal charge. The Standard Industry Fare Level is revised semiannually by the Department of Transportation and in actuality has three rates; the first applies to the first 500 miles of flight, the second to the next 501 to 1500 miles of flight, and the third to any miles over 1500. The terminal charge is also revised semiannually by the Department of Transportation. The aircraft multiple increases with the maximum certified takeoff weight of the aircraft and depends on if the employees present are control or noncontrol employees.

Control employees generally include directors, officers and the top 1% of most highly paid employees. Family members of these employees are also considered control employees. (Top)

Club Memberships

Club memberships must be divided into those for business, pleasure, recreation, or other social purpose and those which are not. Treasury Regulation §1.274-2 defines those for business, pleasure, recreation or other social purpose as including country clubs, golf and athletic clubs, airline clubs, hotel clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussion. Those clubs not included in this definition are business leagues, trade associations, chambers of commerce, boards of trade, real estate boards, professional organizations and civic or public service organizations, unless a principal purpose of the organization is to conduct entertainment activities for members or guests or to provide members or guests with access to entertainment facilities.

IRC § 274(a) prohibits employers from deducting payments for the business, pleasure, recreation or other social purpose club memberships, but such payments that are made for business or trade purposes are still excludable from the employee’s gross income as a working condition fringe, as the employee is not prohibited from deducting such expenses him/herself under IRC §162. To be deductible under §162, the employee should substantiate the percentage of club dues that are used for a valid business purpose, with the time and place of the use, the amount of the dues, the business purpose of the use, and the name and business relationship of the person who was met or entertained. Any personal use by the employee of the club membership will be included in the employee’s gross income.

The following example is provided in Treasury Regulation §1.132-5(s)(3) for illustration: Ex 1. Assume Company X provides Employee B with a country club membership for which it paid $ 20,000. B substantiates that the club was used 40 % for business purposes. The business use of the club (40 %) may be considered a working condition fringe benefit, notwithstanding that the employer's deduction for the dues allocable to the business use is disallowed. Thus, B may exclude from gross income $ 8,000 (40 % of the club dues, which reflects B's business use). X must report $ 12,000 as wages subject to withholding and payment of employment taxes (60 % of the value of the club dues, which reflects B's personal use). B must include $ 12,000 in gross income. X may deduct as compensation the amount it paid for the club dues which reflects B's personal use provided the amount satisfies the other requirements for a salary or compensation deduction
under § 162.

Professional Dues, Publications, and Meetings

Any payments made by the University for professional dues, publications used by employees in their work activities, or attendance at professional/training meetings are excludable to the employee as working condition fringe benefits. This exclusion is due to the fact that if the employee had paid for such items on his/her own, they would be deductible to the employee under IRC §162. (Top)

Complementary and Discounted Tickets to Athletic and Entertainment Events

Such tickets may be considered an excludable fringe benefit under four methods, one of which is a working condition fringe. This exclusion applies only if the ticket is provided to the employee in the department involved in the event and the employee would have had to otherwise pay for the ticket him/herself for a business purpose. For instance, when an athletic director receives a football ticket because he is required to attend the game for recruitment purposes, it is deductible as a working condition fringe. However, this working condition fringe benefit does not apply to the employee's spouse or dependent children. The other three methods of exclusion are as a no-additional cost service, as a qualified employee discount, or as a de minimis fringe benefit. (Top)