Line of business limitations refer to a federal income tax rule that applies to fringe benefits provided by employers to employees. This regulation dictates that if a company operates multiple business lines and an employee receives fringe benefits from a line of business they do not work in, the value of those benefits must be taxed as income.
Grasping the Concept of Line of Business Limitations
As an illustrative example, consider an employee who works at a movie theater owned by a company that also operates an amusement park. If this employee receives free or discounted tickets to the amusement park, they would need to pay taxes on the value of these tickets, as per the IRS. However, if the same employee watches a movie for free at the theater where they work, no taxes would be required since this benefit would not fall under line of business limitations.
Products or services specifically sold to employees rather than the general public are exempt from being treated as employee discounts and do not adhere to the line of business limitations rules.
The definition of an employer’s line of business is found in the Enterprise Standard Industrial Classification (ESIC) Manual, published by the U.S. Office of Management and Budget. An employer is classified as having multiple lines of business if they sell products or services that fall under more than one two-digit ESIC classification.
Uncovering Exemptions from Line of Business Limitations
Certain circumstances allow for the aggregation of business lines to determine eligibility for benefits pertaining to line of business limitations. This aggregation occurs when it is atypical in the employer’s industry for a particular line of business to function independently, or when a significant number of employees contribute substantially to multiple business lines, making it complex to assign them to one specific line. Thus, such employees would not bear taxes on received fringe benefits.
Reciprocal agreements between two employers in the same business line also provide exemptions from the line of business limitations. For these to apply, there must be formal written agreements specifying that neither employer would incur significant additional costs. These reciprocal agreements allow for the provision of tax-free benefits without imposing substantial extra costs; however, they do not extend to qualified employee discounts.
Related Terms: taxable fringe benefits, employee discounts, IRS guidelines, reciprocal agreements, ESIC Manual.
References
- Internal Revenue Service. “Publication 15-B: Employer’s Tax Guide to Fringe Benefits”, Pages 3, 11.
- Internal Revenue Service. “Publication 15-B: Employer’s Tax Guide to Fringe Benefits”, Page 11.
- Electronic Code of Federal Regulations. “Items Specifically Excluded From Gross Income”.
- Internal Revenue Service. “Publication 15-B: Employer’s Tax Guide to Fringe Benefits”, Page 19.
