Sec. 132(a)(2) allows employers to provide a qualified employee discount that is excludable from an employee's taxable income. A qualified employee discount is defined under Sec. 132(c) as a discount with respect to qualified property or services that, in the case of property, does not exceed the gross profit percentage of the price at which the property is offered to customers, or, in the case of services, does not exceed 20% of the price at which the services are offered to customers.
Qualified property does not include real property or property of a type commonly held for investment. Qualified property and services must be offered for sale in the ordinary course of the taxpayer's trade or business in which the employee provides services. For example, employee discounts provided on merchandise only available to employees through a company store will not qualify for exclusion as an employee discount plan.
Qualified employees who can receive tax-free discounts generally include the employee, his or her spouse and dependent children, former employees who retired or left because of disability, and the widow or widower of a deceased employee (Sec. 132(h)).
Regs. Sec. 1.132-3 includes several additional clarifying rules:
* Discounts in excess of the amounts allowed under Sec. 132(a)(2) are includible in the employee's taxable income.
* The qualified employee discount exclusion does not apply to property or services provided by a different employer through a reciprocal agreement to provide discounts to employees of the other employer.
* Property or services may be provided directly or through a third party. For example, an employee of an appliance manufacturer may be allowed a discount when purchasing the appliance through a third-party retailer. However, to qualify for the exclusion, the employee may not receive additional rights, such as an extended warranty, not offered to customers in the employer's ordinary course of business.
* The price at which an employer offers property or services to its customers controls the price used to determine whether an employee discount is...