Ask Fred: “Yes, Cash Is a Benefit”

Question: We often tell our management, “That is a fringe benefit and therefore taxable.” How do we prove to our management that many items such as cash or other small items are taxable income?

Answer: Employers often argue that the little things they provide to employees fall under an allowable provision called “de minimis fringe benefits.” Although such a provision exists, employers often misinterpret it.

De minimis fringe benefits are one of the nontaxable benefits allowed under Section 132 of the Internal Revenue Code. “De minimis” means small. But in this context, the definition of de minimis fringe is a benefit for which the value is so small that accounting for it would be unreasonable or impossible to put into practice. The employer must consider the frequency with which these benefits are provided to employees when making a determination whether the benefit is de minimis or not, under accompanying federal regulations.

Two key points to note in the definition of de minimis fringe are that they must be “unreasonable or administratively impracticable” to track and that there is no mention of cash. If cash was intended to be a de minimis fringe benefit, it would have been written into the code.

The taxability of a payment is not determined by finding an IRC provision that says it is taxable, but rather that no provision excludes it from income. The only type of de minimis fringes that allows cash to be excluded from income is “occasional supper money or cab fare.” A common example of this is when an employer has a policy that gives employees petty cash to buy a meal as a reward for working past their normal workday or workweek schedule.

This discussion leads us to the question, what is cash? For income tax purposes, cash is anything that spends like real cash. A gift certificate, gift card, vacation voucher, check, or direct deposit are just a few examples, since they have an intrinsic direct dollar value.

When teaching payroll courses, I often get the argument that the participant’s employer believes a gift certificate or gift card to be nontaxable because it is not redeemable for cash. This is not true.

The IRS reinforced its stance in this area in 2004 when it determined that a holiday gift coupon with a face value of $35 that was redeemable for merchandise at several local grocery stores was not a de minimis fringe benefit, even though the coupons could only be used once and any unused portion was forfeited. The employer distributed the coupons after it changed its prior holiday gift policy of distributing hams, turkeys, and gift baskets, but the IRS said that a cash equivalent, like a gift card, is not excludable from income. Even though the property bought with the card might be considered a de minimis fringe benefit, the cards have a “readily ascertainable value” that can easily be accounted for, so they fail to meet a key requirement of a de minimis fringe benefit.

For example, if an employer provides an employee with a gift certificate with a face value of $20, that certificate spends the same way a real $20 bill spends. The certificate might limit the person to spending that gift certificate only in certain stores, but within those confines, the $20 certificate is still executable like a $20 bill.

IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits, supports this argument in its discussion of de minimis benefits. Specifically, the IRS states that “[c]ash and cash equivalent fringe benefits (for example, gift certificates, gift cards, and the use of a charge card or credit card), no matter how little, are never excludable as a de minimis benefit. However, meal money and local transportation fare, if provided on an occasional basis and because of overtime work, may be excluded.”

A key phrase to home in on in this statement is “no matter how little.” This shows that the IRS provides no exception for small amounts of cash. There is all the proof anyone should need.

This should provide you with the ammunition you need to convince your employer that what you have been telling them for years is true. The words of a wise man still ring true: “Cash is cash, and cash is taxable.”

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information
Fred A. Basehore, Jr., CPP is owner of F.A. Basehore & Associates offering payroll and payroll tax compliance services and a member of the Bloomberg Tax Payroll Advisory Board. Do you have a payroll question for Ask Fred? Send it to fabjrcpp@yahoo.com.