There are two exclusions for lodging provided by employers to employees. Under IRC §119, the value of lodging furnished to employees by the University is excluded from gross income if:
If any of these elements is missing, the value of the lodging must be included in the employee's gross income. Additionally, cash payments for housing allowances are not included in this exclusion; only in-kind payments are allowed. If the University gives the employee a choice of University provided housing or a housing cash allowance, the housing is not excludable from the employee's income even if accepted.
Under 119(d), there is a special exclusion for employees of educational institutions. If qualified campus lodging is provided to an employee, it will be excluded from the employee's gross income if the employee pays rent equal or in excess of the lesser of 1) 5% of the appraised value of the lodging or 2) the average of rentals paid by individuals (other than students or employees) during the year for school-provided lodging comparable to qualified campus lodging provided to the employee. If the employee does not pay rent equal or lesser than this amount, the employee must include in his/her gross income the difference between the amount paid and the lesser of the two values. Qualified campus lodging is defined as lodging that:
Any housing located on University premises clearly satisfies the first element. The courts addressing the issue have also held that housing not located on University premises may still meet this element if the housing is an integral part of the University's operations or is a place where the employee performs a meaningful portion of his/her duties. The IRS has instead applied a strict interpretation of this element and held lodging provided one to three miles from campus was not on the college premises. Therefore no bright line test exists for this element, but close consideration is given to the employee's duties. Two examples of recent cases follow:
This element requires a "direct nexus" between the lodging furnished and the stated business interest of the employer. This is a question that must be answered based on the facts of the employee's individual situation, but is usually met if it is necessary for the employee to be available for work for longer than normal working hours because of the university's business.
This element has been determined to be essentially the same as the second element, and again requires the direct nexus (see above). Acceptance of the lodging does not need to be an express condition of the employee's contract, as long as proper performance of the employee's duties requires that the employee live on the business premises under an objective standard. In addition, if the employee is required to accept the lodging as a condition of employment, the value of any meal furnished without charge to the employee on the premises is also excluded.
IRC §127 governs the educational assistance given by employers to employees and states that employer-provided educational assistance under a qualified educational assistance program is not included in the employee's gross income. This is true regardless of whether the payment is made to the educational institution or as reimbursement to the employee. The amount of assistance that can be excluded is limited to $5,250.
A qualified educational assistance program is a "separate written plan of an employer for the exclusive benefit of his employees to provide such employees with educational assistance." Therefore the plan must be a written plan not part of another employee benefit plan for the exclusive benefit of employees, and cannot be provided to employee's children or spouses. The plan cannot discriminate in favor of highly compensated employees or as to benefits provided. All employees must receive reasonable notice of this plan and the plan cannot offer employees a choice between the educational assistance and taxable compensation.
Educational assistance includes payments for, but not limited to, tuition, fees, books, supplies, and equipment. It does not include payment for tools or supplies the employee can retain after course completion, meals, lodging or transportation, or any course involving sports, games or hobbies. Since 2001, §127 no longer contains an exception for graduate studies, so currently such studies are excludable under this section.
A tuition reduction program is one under which the university reduces the amount of tuition that must be paid for a current, retired, or disabled employee, the employee's surviving spouse, or the employee's dependent children under IRC §117(d). This reduction in tuition is excluded from the employee's gross income; however, this exclusion only applies to undergraduate studies, not graduate level work. The reduction must also not discriminate in favor of highly compensated employees. Under this exclusion, a child is considered a dependent child if both parents have died, and the child is under age 25. In addition, a dependent of divorced parents is treated as the dependent of both parents. The dependent child definition includes a son, daughter, stepson, stepdaughter, or eligible foster child or adopted child.
Any prizes or awards from the university to an employee in recognition of some achievement in connection with employment must be included in the employee's wages/salary. Awards that are "in connection with employment" include those given for good or outstanding work or for suggestions made to the university, generally encompassing all awards connected with services performed for the university. However, there are two exceptions to this general rule of inclusion: employee achievement awards and de minimis fringe benefit awards.
There is an exclusion from an employee's gross income for employment achievement awards if the university's costs for the award do not exceed $400, or if the award if a qualified plan award, $1,600. A qualified plan award is given under a written plan that does not discriminate in favor of highly compensated employees. An employee achievement award is an award given for a length of service or safety achievement, but it must be presented as part of a meaningful presentation. The award must be of tangible personal property, so cash, gift certificates, intangible property, tickets to theater and sporting events, vacations and real property do not qualify for the exclusion. If the award qualifies but exceeds the dollar amount the employee must include in his/her gross income the excess of the greater of the fair market value or the university's cost of the award, over the $400 or $1600.
A length of service award does not qualify for the exclusion if it is received during the employee's first five years of employment or the employee has received a similar award during any of the previous four years. A retirement award will qualify here as long as it meets the cost limitations above. (Top)
A safety achievement award does not qualify for the exclusion if during that year similar awards have been given to more than 10% of other eligible employees or it is awarded to a manager, administrator, clerical employee or other professional employee. If more than 10% of eligible employees receive such an award, those awards given to employees before the 10% was exceeded are allowed to exclude the award.
An entertainment or meal expense is deductible to the employee and not included in gross income if the expense is an ordinary and necessary business expense under IRC §162 and if it meets the substantiation requirements under IRC §274. Under IRC §162 and §274, for an entertainment expense to be deductible, the employee must be present at the meal and it must
"Directly related" has been held to mean an expense occurring during a business discussion that moves toward a business benefit at some time in the future with business actually being conducted during the entertainment period, or an expense that occurs during a clear business setting. Extravagant expenditures or reciprocal entertainment are not allowed. A meal or other entertainment expense is "associated with" the conduct of a taxpayer's trade or business and therefore not taxable if there was a clear business purpose in making the expenditure and if it directly precedes or follows a substantial and bona fide business-related discussion.
The substantiation requirements of §274 must also be satisfied. Answers to the following questions must be documented and supported by any available receipts or other documentation: 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.
Spousal travel expenses can be treated as a working condition fringe benefit if the employer has not treated such amounts as compensation, the amounts would otherwise be deductible as a business expense because the spouse's presence had a bona fide business purpose, and the employee properly substantiates the expenses. The IRS has not been lenient on what qualifies as a bona fide business purpose. For example, if the spouse serves primarily a social purpose, even in a business setting, this does not qualify. In addition, a spouse's business activities conducted on the trip must be more than incidental; typing notes and attending business functions have been held to be incidental. Please reference the Baylor Travel and Entertainment Policies and Procedures page for a detailed discussion of bona fide business purpose.
If the spouse's expenses are determined to not be deductible, the employee can still deduct those expenses that he would have incurred if traveling alone. For example, if the employee and his spouse shared a rental car, the entire cost of the car would still be deductible since the car would have been needed even if the employee traveled alone.
Substantiation of the travel expenses must be done by the employee following the guidelines under Treasury Regulation §1.132-5(t) and IRC §274(d). These guidelines require the following questions to be answered and documented, preferably by receipts: 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 of persons involved pertaining to the expense. If these requirements are not satisfied, the employee will be denied the benefit exclusion.