It’s always nice when an employer provides employees with a fringe benefit because its value is excluded from gross income, freeing it from federal income tax, and the employer gets a tax deduction.
A no-additional-cost service is one type of fringe benefit. It’s defined as any service provided by an employer to an employee for the employee’s personal use if:
- The service is offered for sale by the employer to its customers in the ordinary course of the employer’s line of business in which the employee performs substantial services, and
- The employer incurs no substantial additional cost in providing the service to the employee, which includes forgone revenue and excludes an amount paid by, or on behalf of, the employee for the service.
The term “employee” includes retirees and former employees who were required to separate from the company because of a disability. It also includes widows or widowers of individuals who died while being employed by such employer.
This no-additional-cost service fringe benefit also applies to the spouse and dependent children of the employee.
A special rule applies to the air transportation industry. Parents of the employee are treated as if they are the employee with the same benefit of flying for free.
Services that are eligible for no-additional-cost treatment include excess capacity services such as:
- Hotel accommodations
- Transportation by aircraft, train, bus, subway or cruise line
- Telephone services
Services that are not eligible for treatment as no-additional-cost services are non-excess-capacity services, such as a stock brokerage firm facilitating the purchase of stock.
The exclusion for no-additional-cost services applies only if the employer does not incur substantial additional cost in providing the service to the employee. The term “cost” also includes revenue that is forgone as a result of providing the service to the employee rather than to a non-employee.