In This Department
EMPLOYEE BENEFITS & PENSIONS
IRS guidance offers useful reminders about employee discount plans; p. 617.
FOREIGN INCOME & TAXPAYERS
Recent developments under FATCA, U.S. withholding tax, and global information reporting; p. 618
Treaty benefits on FDAP income derived by hybrid entities; p. 620.
PARTNERS & PARTNERSHIPS
How the death of a partner could affect a partnership's year end; p. 624.
Sales-and-use-tax pitfalls in the construction and real estate industries; p. 627.
STATE & LOCAL TAXES
State tax considerations for foreign companies with inbound U.S. investments; p. 630.
Unless otherwise noted, contributors are members of or associated with Crowe Horwath LLP
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Employee Benefits & Pensions
IRS guidance offers useful reminders about employee discount plans
The IRS recently released Field Attorney Advice 20171202F, which provides guidance on the taxability of an employee discount plan.
Under the discount plan as described (with identifying details redacted), employees could designate a certain number of individuals, including themselves, to receive a discount on services from the employer. Designated individuals could include spouses or domestic partners, family members, and friends of the employee. Individuals eligible for the discount were required to create an account from which they received a discount of a certain percentage off the published rates for the employer's services. The employer claimed the discount was, in most cases, less than the discount offered to the employer's large customers or under certain customer discount programs but did not provide supporting evidence of this to the examining agent.
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 excludable. In cases where the employer offers a discounted price to a discrete customer group, and the sales at that discounted price comprise at least 35% of gross sales for a representative period, then in determining the employee discount, the discounted price is considered the price at which the service is being offered to customers.
Although the response from the Office of Chief Counsel (OCC) to the examining agent was heavily redacted, the published portion of the response is consistent with the law and clearly unfavorable to the taxpayer. First, the OCC agreed with the examiner that the discount pertained to services, not property. Second, regarding who is considered an employee, the OCC confirmed that only individuals identified as employees under Sec. 132(h) or the related regulations qualified for the exclusion of an employee discount from taxable income. Any discount received by someone who was outside the definition of a qualified employee was includible in the wages of the employee who designated that individual.
Third, the OCC confirmed that a rate for property or services lower than a published rate may be used to determine whether an employee discount is qualified for exclusion if at least 35% of gross sales to ordinary customers are made at a discounted rate. However, the employer in this case did not provide sufficient evidence regarding standard discounts provided to corporate customers to prove that the employee discount should be based upon the discount rates provided to those customers, instead of its published rates. Therefore, the employer was required to use the published rates to determine the taxable portion of the discount until the employer provided the required customer discount information. The OCC, noting that the employee discount rate was more than 20% of the published rates, stated that the employer must include the excess discount in the employees' gross income as a taxable fringe benefit and withhold and pay employment taxes on that amount.
Discount plans are a common and easy way to provide an incentive to employees for their service. However, as demonstrated, the rules permitting an employer to exclude the employee discount from taxable income are complex and easy to run afoul of, especially when documentation is poor.
Companies offering employee discount plans should review their plans closely in light of this IRS guidance to determine whether they must make adjustments to align with statutory and regulatory requirements. Current payroll applications should be modified to identify any discounts that must be included in employees' taxable income and include the corresponding information on Forms W-2, Wage and Tax Statement, as well as to perform the applicable withholding. If taxpayers do not have a system that can identify any discounts that are includible in taxable income, they should institute a process to do so and thus comply with statutory and regulatory requirements.
From Allen F. Tobin, J.D., New York City, and David J. Holets, CPA, Indianapolis
Foreign Income & Taxpayers
Recent developments under FATCA, U.S. withholding tax, and global information reporting
The Foreign Account Tax Compliance Act (FATCA) has been gradually implemented over the course of several years, starting with its enactment in 2010. FATCA was primarily enacted to combat tax evasion by U.S. persons holding investments in offshore accounts. FATCA withholding became effective in 2014, and the law has come into force over time, using staggered effective dates. Due to the complexity of the legislation, multiple delays and transitional rules regarding effective dates for various aspects of the law have been provided through ongoing IRS guidance.
FATCA levies a 30% withholding tax on U.S.-source payments of fixed or determinable, annual or periodical (FDAP) income unless its prescriptive requirements regarding payee documentation are met. On Dec. 30, 2016, the IRS released additional final FATCA regulations. These additions introduced changes regarding documentation of sponsored entities and the associated registration process on behalf of a sponsoring entity. Beginning in 2019, the withholding tax of 30% will apply to gross proceeds from the sale or other disposition of any property of a type that can produce U.S.-source FDAP income, further expanding the law's reach.
As of this writing, 113 countries had entered into intergovernmental agreements (IGAs) with the United States under FATCA. IGAs are contractual agreements that require countries to facilitate the reporting of information mandated under FATCA by their resident companies, either directly or indirectly, with the U.S. government.
As a group, IGAs do the following:
* Provide an agreed set of definitions and procedural requirements, including the treatment of resident entities, associated duties, and the prerequisites for certain entities to be exempt from registration, under FATCA.
* Set thresholds on the values of accounts that are required to be documented and reported.
* Provide guidance and safe-harbor rules regarding information that is required to be obtained and reviewed by the resident payer.
* In certain instances, extend the deadline for FATCA reporting for resident entities.
Treatment of sponsored entities
Notice 2015-66 delayed the effective date for the requirement of sponsored entities to obtain their own global intermediary identification number (GUN) until Dec. 31, 2016. A sponsored entity is one that has contracted with another entity to perform its FATCA-related duties. The final regulations issued in T.D. 9809 extended the requirement for sponsored entities to obtain their own GUN three months, through March 31, 2017. Because the IRS has not extended the exception beyond March 31, 2017, a withholding agent that does not have the GUN of a sponsored entity must withhold 30% on withholdable payments made after this date. As such, withholding agents should be in...