Providing Sec. 132 fringe benefits to S corporation employees.

• Author: Ellentuck, Albert B.

S CORPORATIONS CAN OFFER EMPLOYEES THE same fringe benefits as other business entities; however, so-called 2% shareholders (shareholders owning more than 2% of the corporation's outstanding stock on any day during the S corporation's tax year, considering both direct and constructive ownership) are treated as partners for fringe benefit purposes. Because partners generally are considered self-employed persons rather than employees, tax-favored treatment (i.e., corporate deductibility and employee exclusion from income) for employee fringe benefits paid on behalf of 2% shareholders appears to be unavailable unless a specific statute treats a partner as an employee.

Sec. 132 fringe benefits are an exception. Sec. 132 fringe benefits (also known as work-related or statutory fringe benefits) include qualified employee discounts, no-additional-cost services, working condition fringe benefits, de minimis fringe benefits, on-premises athletic facilities, qualified transportation fringe benefits, qualified moving expense reimbursements, and qualified retirement planning services. All Sec. 132 fringe benefits, except for qualified transportation fringe benefits and qualified moving expense reimbursements, are available on a tax-favored basis to 2% shareholders.

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No-Additional-Cost Services

No-additional-cost services are excluded from income if the service is sold by the S corporation in the line of business in which the employee performs services and the S corporation does not incur any significant additional costs (including forgone revenue) in providing these services to the employee (Sec. 132(b); Regs. Sec. 1.132-2(a)). The nondiscrimination rules of Regs. Sec. 1,132-8 apply, and only excess capacity services (such as hotels; transportation by aircraft, train, bus, subway, or cruise line; or telephone services) qualify for the exclusion. Nonexcess capacity services (e.g., facilitating stock purchases by a brokerage house, providing legal services to law firm employees, or leasing property) are not eligible for the exclusion but may be eligible for the qualified employee discount exclusion.

Qualified Employee Discounts

A qualified employee discount under Sec. 132(c) is a price reduction provided to an employee on property or services generally offered to outside customers in the S corporation's ordinary course of business. A common example is an employee discount for retail store employees. The employee must perform services...