By Peter Watts
The Internal Revenue Service has recently provided guidance on the tax treatment of vouchers, coupons, and gift certificates that employers provide to employees for special occasions, such as birthdays, and for employee awards. The advice, recently provided by IRS Federal State and Local Government (FSLG) Specialist Marilee Basaraba of Oregon, states that all gift certificates, coupons, and other cash equivalents are taxable to the employee upon receipt. Many employers and employees have been treating the gift certificates as de minimis fringe benefits, and as a result employees have not been reporting them as income. It is clear from the advice provided by Ms. Basaraba that the de minimis exception will not be available for any cash equivalents, including, gift certificates, coupons, or vouchers of any kind.
The recent guidance could have a chilling effect on the use of gift certificates and coupons to celebrate birthdays and holidays and employee achievement. Although the result seems harsh, Ms. Basaraba has correctly interpreted the law. Treasury Regulation 1.132-6(c), provides that a cash equivalent fringe benefit is generally not excludable, even if the property or service acquired would be excludable as a de minimis fringe benefit. Thus, tickets to a movie would be an excludable fringe benefit, but a coupon entitling a person to see a movie at a particular theater would be includable in income. A $50 shirt from Nordstrom would be excludable from income, but a $50 gift certificate to Nordstrom would be includable.
The justification for the Service¹s position is that unlike awards of property, a cash equivalent can be easily administered by the employer.