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4.1. ERMUSR 05-12-2009
. ~, Elk River Municipal Utilities 13069 Orono Parkway • P.O. Box 430 Elk River, MN 55330-0430 April 30, 2009 To: Elk River Municipal Utilities Commission John Dietz Jerry Gumphrey Daryl Thompson From: Troy Adams Subject: Company Vehicle Take-Home Practice 4~1 Phone: 763.441.2020 Fax: 763.441.8099 At the April Commission meeting the agenda item pertaining to ERMU's company vehicle take- home practice was tabled until May to allow for verification of information regarding tax implications. There was a question as to whether or not the employees taking on-call vehicles home would be subject to taxation. The Utilities' interpretation of the tax code had always been that the take-home vehicles were tax exempted as "public safety" vehicles as specified in IRS Publication 15-B. The League of Minnesota Cities had looked into this topic on the Utilities' behalf and concluded that there may be tax implications. They referred staff to IRS Representative Steve Bruzda for a definitive ruling. The IRS representative confirmed that there are tax implications with the exception of the Security on-call vehicle. (Refer to the attached letter and supporting documentation from IRS Representative Steve Bruzda) Even though the Utilities' on-call vehicles are used for emergency response, Utility on-call vehicles are not tax exempt as "public safety" vehicles in the eyes of the IRS. This "public safety" exception is for firefighters, police, emergency responders, and clergy. Based on this, going forward the take-home vehicle benefit will be subject to taxation for the applicable ERMU employees. There are a number of methods to calculate this tax including fair market value, mileage, and commuter rule (see attached spreadsheet of applicable ERMU employees and the different taxations methods). Administered within the limits of the tax code, this taxation will be implemented such that it has the least impact to the employees. Through the investigation into the tax implications of these vehicles, it has been determined that ERMU's policy handbookneeds to be updated with clarifications pertaining to the take-home vehicle on-call practice in order for the practice to meet Minnesota Statute 471.666. This statute deals with publicly owned vehicles and prohibits their personal use. The Utilities' vehicles do not fall under the "public safety" exception as previously interpreted. However, the actual ERMU take-home vehicle on-call practice is still permitted under 471.66 Subd. 3 (1) because the on-call responsibilities associated with the take-home vehicles qualify as "work-related activities during hours when the employee is not working." The ERMU take-home vehicle on-call practice and the responsibilities and requirements to be on-call are not written policies, but have been long practiced by the Utilities over the previous decades. These on-call practices and requirements need to be documented as policy. This brings forth the inevitable philosophical discussion on who is required to be on-call and who needs atake-home vehicle. Although being on-call and having atake-home vehicle do not technically go hand in hand, in all practical purposes they do. For a company to require an employee to be on-call, the company needs to provide the equipment for the employee to be able to respond. Specifically to this discussion, the employer needs to provide a vehicle for the on-call employee to be able to respond. This is an important part of providing the equipment and training needed for emergency preparedness. Without that company vehicle, the employer could be compromising customer service, response time, public safety, and the on-call employee's safety. Even within ERMU there are cases where an employee only has one personal vehicle at home. If that vehicle were not at home because it's being use by a spouse/dependent, the on-call response time would greatly be affected. Many times the scene of an accident that prompts the summoning of an on- call employee is already secured bylaw enforcement. When the scene is secured, an on-call employee would not be able to gain access in a personal vehicle to assess and make decisions/communications in order to facilitate safe/quick restoration of service. If the on-call employee is the first to the scene but arrives in a personal vehicle, the employee would not be able to safely secure the scene and protect the public because the personal vehicle lacks the required equipment. The company vehicles are equipped with radios for communication, personal protection equipment, flashing and/or visual safety indicators, equipment, and supplies. It is neither practical nor good loss prevention practice to have employees equip their personal vehicles with these items while being on-call. If an on-call employee needed to report to the Utilities plant with a personal vehicle to get a company vehicle before responding to a scene, valuable time could be lost. Not being able to respond directly to a scene compromises customer service and safety. The bottom line is that for an employee to be required to be on-call, the employer needs to provide the employee with the equipment to respond. This includes a vehicle. If for the safety of the public the on-call employees need to be provided with atake-home vehicle, this then brings up the question of who should be required to be on-call. There are a number of different on-call situations within the Utilities. There are on-call electric and water employees that are paid a stipend and have use of a vehicle for aweek of on-call (engaged to wait). There are managers that are on call 24/7/365 who are not paid a stipend but have use of a take-home vehicle (i.e. waiting to engage on-call). And, there is also a security technician on- call 24/7/365 that is not paid a stipend but has the use of a take-home vehicle. Each of these on- call situations is part of a company commitment to excellent customer service and public safety. The general reasons for electric and water employees to be on-call are customer service and safety. As the mission statement says, the Utilities provides safe and reliable services. Part of providing safe reliable services is being able to respond to emergencies, outages, water main breaks, and other after hour situations. And again, by being able to respond directly to the scene in a take-home vehicle, the employee is able to use the radio to call for addition resources or assistance including police, firefighters, emergency responders, or other utilities. These calls would not be able to be made in the same expedited manner if the employee were not in a company vehicle equipped with the items needed to safely do their job or if the employee had to drive to the plant to pick up the company vehicle prior to responding. It is the Utilities' responsibility that on-call employees are available after hours and are equipped, including the take-home vehicle, to respond as needed to provide good customer service while protecting the safety of the public. The reasons for management to be on-call are as important, but maybe less obvious to those unfamiliar with the inner workings of the Utilities. There are a number of reasons managers may be called after hours. One important reason is to be able to make financial decisions. There may be cases involving water main breaks or major equipment failures where significant financial decisions need to be made on the spot to restore the utilities and protect the safety of the public. For example, if a water main was to break and third party contractors were needed to be hired in the middle of the night at the cost of thousands of dollars, management would need to make that decision and be responsible for it. Another example would be if a substation power transformer was to fail or the relay protection tripped and shut down the substation. In these cases, decisions would be made that could have substantial financial impact. Procuring a mobile substation or temporary replacement equipment, third party equipment testing or relay protection programming, or third party fault locating would be major decisions that should be made by management. If a substation were to go down, there could be elaborate and extensive switching orders needing to be written and communicated to facilitate rerouting feeders and temporary power while repairs and restoration are in process. This would need to be done by management. When (not if) a major storm hits Elk River and there is extensive damage to the electrical distribution infrastructure, management will need to respond and assess in order to implement an emergency action plan and restoration of services. All of these examples would require first hand assessment of the situation prior to decisions being made. The frequency of these types of occurrences would hopefully be few. But there is little doubt that when they happen, management needs to be equipped and able to respond. This includes providing take-home vehicles. As discussed last month, the frequency of call-outs is an irrelevant number for the valuation of emergency preparedness. The number of times management has been called out in the last couple of years is minimal. However, because of the recent personnel changes and staff restructuring, these frequencies of call-out numbers are even more irrelevant and not directly applicable. These previous numbers were based on different personnel in management and different personnel in lead lineworker positions. With recent promotions, the personnel handling specific situations will be different. The need for teamwork is very important at a time of company transition especially in an industry as dangerous as ours. The probability for management to be called now is much higher than in years past and also more important. Also specifically related to the electric department managers, teamwork is absolutely critical. The Director of Operations, Electric Line Superintendent, and Technical Services Superintendent will all need to work together and be one anothers' backups especially in this time of transition. There will be times when all three are needed to resolve an after hours situation. This is part of having the personnel, the training, and the equipment to effectively and efficiently respond to any issue. In other words, this is emergency preparedness. The reasons for the Security Technician to be on-call are different. This really comes down to customer service. The security systems with monitoring and fire alarm monitoring are sold and have been sold under the understanding that with the 24/7/365 monitoring comes 24/7/365 technical support. (Refer to the attached ERMU Security brochure). These calls get directed to the Security Technician. Because of this employee's vast knowledge of the equipment and installation techniques and this employee's problem solving skills, only approximately 6.25% of after-hours calls require an after-hours trip. If there were someone else in this position, the percentage would probably be much higher. These cases that do require the after-hours trip are typically commercial accounts, but sometimes a specific or special need of a residential customer may require that immediate response as well. Many of these after-hours trips are billable to the customer. Currently there are approximately 700 security accounts. Of these there are 230 that are outside of the City of Elk River. That is one-third of the security accounts that are not within the City of Elk River. (Refer to the attached list of cities with ERMU security accounts that are outside of the City of Elk River). Because of this, the probability of extending the response time by traveling to the plant first and then deploying to the source of the call is even higher. That directly impacts customer service because of the increase in response time for what is obviously a critical after-hours calls. In order for the Utilities to maintain the level of customer service that has been sold to our security customers, there needs to be a security technician on-call after- hours. And in order for the Security Technician to be able to respond in the few critical after- hours emergencies, the Security Technician needs to be equipped to do so. To provide that level of customer service, the Security Technician needs to be equipped with atake-home vehicle. Another aspect to eliminating on-call for some or all the current on-call employees is the impact to employee morale. After a tumultuous year of change and uncertainty for the Utilities, the employees had finally started to move on and unite in a common goal again. That is, until recently when talk of reduced work hours and 0% cost of living increase brought employee morale crashing to an all-time low. In the eyes of the employees, eliminating on-call and take- home vehicles is just one more thing under attack, disrupting the focus of the company from providing safe and reliable services to our ratepayers. Also, there is the benefit to the employee that is attached to the on-call and take-home vehicles. Specifically to the Security Technician, this employee was hired with 24/7/365 on-call and atake-home vehicle as part of the hiring negotiations. These are typical within the security industry and are offered by ERMU's competitors for similar jobs. This is true for management as well. Take-home vehicles are typical for management at municipals, coops, and utility engineering consultant firms. Eliminating this benefit creates a competitive disadvantage to attract and retain top talent. If even one ERMU employee affected by the elimination of on-call or take-home vehicle were to leave, the cost to the company to rehire, train, and assimilate into the Utilities would greatly exceed any savings from eliminating this practices. As discussed at the April Commission meeting, the cost, depending on the assumptions made, of the on-call take-home vehicles could fall within the range of $6000 to $10000 per year. Either way, this is only 0.0002% of the budget. But the cost of the negative impact to morale and employee retention could greatly exceed that. A 0.0002% budget savings given back to the ratepayers as negative PCA credit would not be noticeable. A reduction in customer service and a reduction in the Utilities ability to provide safe reliable utilities could be noticed. It becomes a matter of public perception. The bottom line is that the Utilities' employees want to do the best job they can and pride themselves on their workmanship and sense of ownership in the system. The employees need to be provided with the training and equipment required to supply the ratepayers with the highest level of customer service providing safe and reliable utilities. Part of this is the on-call emergency preparedness. And a critical part of emergency preparedness is the take-home vehicles. This is important to the employees and to the customers. As previously stated, the value to the Utilities in the 0.0002% of the budget allocated for on-call take-home vehicles is found in the intangibles and not in the frequency of call-outs. This is Utilities' added ability to better service their customers through emergency preparedness and quick response time. ,~geesu~r Z ~ '~ a yt `' $EYENV~ TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION Date: 4/30/09 Ms. Theresa Slominski Elk River Municipal Utilities 13069 Orono Parkway, P.O. Box 430 Elk River, MN. 55330-0430 Dear Ms. Slominski: DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON. D.C. 20224 This is in response to your email dated April 30, 2009, requesting clarification on the following vehicle fringe benefit questions: We would like clarification on these items in the form of a memo: 1) Utility vehicles are not exempt as public safety/emergency response vehicles (we had thought they were previously) 2) Retroactive pay will not be necessary if we implement taxation moving forward, 3) The commuting rule rate of $1.50 per trip is applicable for proper taxation of the vehicles 4' The security van is exempt as a qualified vehicle S, .'or the proper taxation of vehicles per employee, is the same rule to be applied to everyone or can it be case by case? (If everyone doesn't qualify for the commuting rule, can we select FMV or mileage individually? How is that determined which rule to apply?) To recap, we have an electric on-call vehicle where the individual is paid to "engage to wait" and takes a phone and vehicle for the week to respond to any calls. We have a rotation of employees who use the same on-call vehicle (a pickup.) We also have a water on-call individual (engaged to wait) in a rotation that takes a phone and their designated work truck (pickup) that is assigned to them. This on-call vehicle is different week to week depending on the employee. The security vehicle is a van that has been tnodified with shelving instead of seats and is taken home every evening. This is one employee that is responsible for all aspects of the security "business" and takes calls 24/7 and responds appropriately. This employee is waiting to engage, ie is not paid an additional stipend to be on-call 24/7. Currently there are four managers that take a vehicle home and are waiting to engage in that they would be required to respond to any emergency situation. 'Thanks so much for your help. Please let us know if you have additional questions. Theresa, Troy Response ~1. Utility vehicles are not public safety/emergency response vehicles. To be a qualified nonpersonal use vehicle the vehicle must be a clearly marked public safety officer vehicle that is required to be used for commuting by a public safety officer as defined in section 402(1)(4)(C) who, is on call all the time, provided that any personal use (other than commuting) of the vehicle outside the limit of the public safety officers obligation to respond to an emergency prohibited. Section 402(1)(4)(C) states that a public safety officer is a law enforcement officer, a firefighter, a chaplain, or as a member of a rescue squad or ambulance crew. As such, your utility vehicles do not qualify as nonpersonal use vehicles because your drivers are not public safety officers. Enclosed you will find Publication 15-B, part of the 2009 Taxable Fringe Benefit Guide, and Regulations on who is a public safety officer. Note-See Publication 15-B and page 53 of the Taxable Fringe Benefit Guide for other types of vehicles that are qualified nonpersonal use vehicles. #2. Since the taxable vehicle fringe benefit is minimal, assuming the commuting valuation rule is used, I have no problem with you reporting the taxable fringe benefit moving forward. #3. I can't say for sure that your employees qualify for the commuting rule of $1.50 per commute. Publication 15-B (Page 21) and the Taxable Fringe Benefit Guide (Page 52) provides the requirements to take the commuting valuation rate. For example, one requirement is that the employer have a written policy prohibiting personal use other than to commute. You should review the rules and make a determination if the commuting valuation rule may be used. #4. It would appear that your van does qualify as a qualified nonpersonal use vehicle. However, you should make this determination based on the van requirements of the Taxable Fringe Benefit Guide (Page 54 & 55) and Publication 15-B (Page 19). #5. The proper taxation is on a case by case basis. See the Taxable Fringe Benefit Guide (Pages 48 - 52) and Publication 15-B (Pages 19 - 24) for the various rules to compute the vehicle fringe benefit. ~ hope this helps! Also, please call me at 651-312-7722 if you have any other questions Sincerely, ~~' ~ r'~ ~"~ ~ °. Steve Bruzda FSLG Specialist Letter 3575 (Rev. 01-2003) Catalog Number: 34413) FFF ~ ~ Employer-Provided Vehicle If an employer provides a vehicle which is used exclusively for business purposes (except for allowable de minimis use, discussed later) there are no tax consequences or reporting. Business use does not include commuting (except as discussed later). Records should be maintained to substantiate that all vehicle use was for business. Employer Vehicle Used for Both Business and Personal Use If an employer-provided vehicle is used for both business and personal purposes, substantiated (see Substantiation Requirements, below) business use is not taxable to the employee. Personal use is taxable to the employee as wages. The employer can opt to include all use as wages; however, the employee can pay the employer for personal use rather than having it treated as wages. Reg. ~' 1.61-21(c) What is Personal Use? The following are examples of taxable personal use of anemployer-provided vehicle: Commuting between residence and work station. Vacation, weekend use, or use by spouse or dependents. The employee goes into his office on the weekend. This is personal commuting, regardless of whether it is required by the employer. Reg. X1.162-2(e) Examples of De Minimis Nontaxable Personal Use • Small personal detour while on business, such as driving to lunch while out of the office on business. • Infrequent (not more than one day per month) commuting in employer vehicle. This does not mean that an employee can receive excludable reimbursements for commuting 12 days a year. The rule is available to cover infrequent, occasional situations. Reg. ~ 1.132-6(d)(3) Example: An employee uses a motor pool vehicle for a business meeting. The employer requires that motor pool vehicles be returned at the end of the business day, but the employee is delayed and ±he motor pool is closed when the employee arrives back at the office. The employee takes the vehicle home and returns it the next morning. Assuming that this is an infrequent occurrence for that employee (generally happening no more than once a month) the commuting value of the trip would be considered a nontaxable de minimis fringe benefit. If not an infrequent occurrence, the commuting would be taxable to the employee. Substantiation Requirements 48 Separate records for business and personal mileage are required. IRC 274(d) If records are not provided by the employee, the value of all use of the automobile is wages to the employee, and the employee can then take itemized deductions for any substantiated business use on Form 1040, Schedule A. Reg. ,¢1.132-5(b) If records are provided by the employee to the employer, only the personal use of the automobile is wages to the employee. Exceptions to the recordkeeping requirements apply in certain situations discussed latter in this chapter. Valuing Personal Use of Employer-Provided Vehicle Personal use of an employer's vehicle is taxable wages to the employee. The following procedure should be used to determine how much to include in wages on the employee's Form W-2. Reg. ,¢1.162-2(d) Sten l: Compute personal use based on miles driven Example: 2,000 personal miles/10,000 total miles = 20% Personal use Stev 2: Apply valuation rule -General Valuation Rule or one of three special automobile valuation rules General Valuation Rule Computation: 1. Determine what employee would pay to lease auto (FMV*). 2. Multiply FMV by % of personal use (computed in Step 1). Example: Cost to lease car (FMV) for 1 yr. plus value of fuel provided $ 4,000 3. Multiply by 20% personal use 20% Include in wage of employee $ 800 * FMV (fair market value) -the amount an employee would have to pay to a third party in an arms-Length transaction. Reg. ~ 1.61-21(b)("4) Three Special Automobile Valuation Rules • Automobile Lease Valuation Rule Reg. ,¢1.61-21(d) • Vehicle Cents-Per-Mile Rule Reg. ¢1.61-21(e) • Commuting Rule Reg. X1.61-21(~ 49 General requirements for using these special valuations: ~ Employer and employee must timely report personal use as wages. ~ Generally, the rules are applied on avehicle-by-vehicle basis. Employer may use different rules for different vehicles. Automobile Lease Valuation Rule Compute the value for purposes of the lease valuation rule as follows: 1. Determine the fair market value (FMV) of vehicle on first day made available to employee. 2. Use the table in Reg. § 1.61-21(d)(iii) or Pub. 15-B to compute the annual lease value; 3. Multiply the annual lease value by the percentage of personal use computed in Step 1. 4. If fuel is provided, add 5.5¢ per mile driven by the employee to the table lease value. Maintenance and insurance costs are included. Reg. x'1.61-21(d) Note: The employer's cost, including tax, title, etc. may be used to determine the FMV. See the Regulations for information on the valuation of leased vehicles. Reg. x'1.61-21(d)(5) Example: Joe, an employee of Agency XYZ, uses an agency-provided car. In 2009, Joe drives the car 20,000 miles, of which 4,000 were personal miles or 20% (4,000/20,000 = 20%). The FMV of the car is $14,500 for an Annual Lease Value of $4,100. Personal use is valued at $820: ($4,100 x 20%) plus $220 (5.5¢ x 4,000 miles) for fuel costs. $1,040 ($820 + $220) is included in Joe's wages. Recalculation of Value after 4-Year Lease Term Once computed, the Annual Lease Value remains in effect until 12/31 of the 4th full calendar year after the rule is first applied. Reg. ,¢1.61-21(d)(2) Example: Joe is assigned an agency-provided car on 2/17/08. The agency uses the same $4,100 annual lease valuation until 12/31/12. After the 4`h full year, or if the vehicle is transferred to another employee, the value may be recalculated (unless the purpose of the transfer is only to reduce the tax). 50 Daily Lease Value This method is required if the vehicle is available for less than 30 days. Figure the daily lease value by multiplying the annual lease value by a fraction, using four times the number of days of availability as the numerator, and 365 as the denominator. However, you can apply a prorated annual lease value for a period of continuous availability of less than 30 days by treating the automobile as if it had been available for 30 days. Use a prorated annual lease value if it would result in a lower valuation than applying the daily lease value to the shorter period of availability. Reg.. ,¢l. 61-21(d)(4) Fleet Average Value If the employer has 20 or more cars used for business and personal use by employees, a "fleet- average value" maybe used to calculate the annual lease valuation. For 2009, each vehicle must be valued at less than $19,900. (For trucks, the amount is also $19,900.) Reg. ,¢1.61-21(d)(5)(v); Rev. Proc. 2009-12 Vehicle Cents-Per-Mile Rule To use the vehicle cents-per-mile rule, the vehicle must meet one of the following tests: It is regularly used (50% or more each year) in the employer's business, or is Generally used each workday to transport at least three employees to and from work, in an employer sponsored commuting vehicle pool, or is Driven by employees at least 10,000 miles per year. Continued Usage Rule You must continue using the cents-per-mile rule for the vehicle unless the vehicle no longer meets the requirements, except that an employer may change to the commuting valuation rule. Limitation on Value For 2009, the cents-per-mile valuation rule cannot be used for cars with FMV exceeding $15,000 (2009) The amount for trucks is $15,200. Note: This amount is revised annually. Rev. Proc. 2009- 12; Rev. Reg. X1.61-21(e)(1); Reg. 1.280F Computation Multiply the standard mileage rate by number of personal miles driven. If fuel is not provided, the standard mileage rate can be reduced by up to 5.5 cents (55 cents - 5.5 cents = 49.5 cents in 2009). Reg. X1.61-21(e) 51 Example: Joe drives his agency-provided car for 2,000 personal miles in 2009. The amount included as a wage is $1,100 (55 cents x 2,000 personal miles) or if no fuel is provided it would be $980 (49.5 cents x 2000 miles). Commuting Valuation Rule Personal use for commuting can be valued at $1.50 each way if: • The vehicle is owned or leased by the employer; • The vehicle is provided to the employee for business use; and • The employer requires the employee to commute in the vehicle for a valid non- compensatory business reasons • Employer has a written policy prohibiting personal use other than commuting, and • Employee does not use the vehicle for other than de minimis personal use If more than one employee commutes in the vehicle, the $1.50 each-way rule applies to each employee. Reg. ¢1.61-21(1) Note: The employer must require the employee to use the vehicle for a business purpose; it cannot be voluntary on the employee's part. Example: A transportation employee, who is on ca1124 hours a day to respond to road emergencies, is required by his employer to commute in a vehicle outfitted with communications or other equipment the employee would need if called out at night. Commuting Rule Not Available for "Control Employee" Personal use of a vehicle by a "control employee" cannot be valued using the commuting valuation rule ($1.50 rule). A control employee in a governmental organization is either an: 1. Elected official, or an 2. Employee whose compensation is at least as great as a Federal government employee at Executive Level V (2009 - $143,500) Reg. ,¢1.61-21(f)(6) ; EO 12/19/08 Instead of the above defmition of control employee, the employer may treat all employees who are "highly compensated" (Generally, for 2009, those exceeding $110,000 compensation) as their only control employees. IR 2008-18; Reg. 1.132-8(1) Example: An agency in a rural area does not have secure parking and has had a history of vandalism to its vehicles. The employer requires employees using the vehicles for the day on business to take the vehicles home overnight. The trip home and to the office the next day is considered taxable personal commuting. The commuting may be valued at $1.50 each way since the employee had a valid noncompensatory business reason for commuting in the employer's 52 vehicle. If this was an unusual situation for the employee, that is, generally occurring no more than once a month, the commuting could be considered a nontaxable de minimis fringe benefit. Example: An agency requires an employee to take home a van to carry displays and equipment to a trade show the next day. In this situation, the commuting could be valued at $1.50 for the trip from the office to home since the agency is requiring the employee to use a specific vehicle for valid business reasons (assuming the other rules listed above are met). If this was an unusual situation for the employee, that is, generally occurring no more than once a month, the commuting could be considered a nontaxable de minimis fringe benefit. Qualified Nonpersonal Use Vehicle Use of a qualified Nonpersonal use vehicle, including commuting, is excludable to the employee; and recordkeeping and substantiation by the employee are not required by the IRS. Reg. ~ 1.274- ST(k; Reg. ,¢ 1.132-5(li) Qualified Nonpersonal Use Vehicle A qualified nonpersonal use vehicle is any vehicle that the employee is not likely to use more than minimally for personal purposes because of its design. Qualified nonpersonal use vehicles generally include.all of the following vehicles. • Clearly marked police and fire vehicles* • Unmarked vehicles used by law enforcement officers if the use is officially authorized* • Qualified specialized utility repair truck* • An ambulance or hearse used for its specific purpose • Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds • Delivery trucks with seating for the driver only, or the driver plus a folding jump seat • A passenger bus with a capacity of at least 20 passengers used for its specific purpose • Construction or specially designed work vehicles, (i.e., bucket trucks, dump trucks, cement mixers, forklifts, garbage trucks) • School buses • Tractors, combines and other special-purpose farm vehicles. Reg. ,¢ 1.274-(k)(2) * These vehicles are discussed in greater detail below. Clearly Marked Police, Fire, or Public Safety Officer Vehicles A clearly marked police, fire, or public safety officer vehicle qualifies only if the following apply: 53 Employee must always be on call. Employee must be required by the employer to use the vehicle for commuting. Employer must prohibit personal use (other than commuting) for travel outside of the officer or firefighter's jurisdiction. Reg. § 1.274-ST(k)(3); Prop. Reg. 106897-08 A police, fire, or public safety officer vehicle is clearly marked if, through painted insignia or words, it is readily apparent that the vehicle is a police, fire, or public safety officer vehicle. A marking on a license plate is not a clear marking for this purpose. Unmarked Law Enforcement Vehicles Unmarked law enforcement vehicles are qualified nonpersonal use vehicles only if the following apply: The employer must officially authorize personal use Personal use must be incident to use for law-enforcement purposes; i.e., no vacation use. • The employer must be a governmental unit responsible for prevention or investigation of crime. The vehicle must be used by a full-time law enforcement officer; i.e. officer authorized to carry firearms, execute warrants, and make arrests. The officer must regularly carry fu-earms, except when it is not possible to do so because of the requirements of undercover work. Reg. ~' 1.274-ST(k) (6) Qualified Specialized Utility Repair Truck The following tests must be met for a specialized utility repair truck to qualify as a qualified nonpersonal use vehicle: The truck (not van or pickup) is designed to carry tools, equipment, etc. The truck has permanent interior construction, including shelves and racks. The employer must require employee to commute for emergency call-outs to restore or maintain power services, i.e., gas, water, sewer. Reg. ~¢ 1.274-ST(k)(S) Vans and pickup trucks do not qualify as qualified nonpersonal use vehicles unless specifically modified to be unlikely to have more than minimal personal use. For a van or pickup truck with a loaded gross vehicle weight of 14,000 pounds or less, the vehicle must be clearly marked with permanently affixed decals, special painting, or other advertising associated with the trade, business, or function and: Vans must have a seat for the driver only (or the driver and one other person) and either of the following items: • Permanent shelving that fills most of the cargo area, or 54 • An open cargo area, and the van always carries merchandise, material, or equipment used 1n your trade, business, or function. Rev. Rul. 86-97PLR 200236022 Pickup trucks must meet either of the following requirements: 1. Equipped with at least one of the following items: a. A hydraulic lift gate. b. Permanent tanks or drums. c. Permanent side boards or panels that materially raise the level of the sides of the truck bed. 2. Used primarily to transport a particular type of load (other than over the public highways) in a construction, manufacturing, processing, arming, mining, drilling, timbering, or other similar operation for which it was specially designed or significantly modified. Safe Harbor Substantiation Rules Employees using employer vehicles are not required to keep detailed records of vehicle use if all of the following tests are met: For vehicles not used for personal purposes: • Vehicle is owned or leased by the employer • Vehicle is provided to the employee for use in the employer's business • When not in use, the vehicle is kept on employer's premises (i.e., motor pool cars) • No employee using the vehicle lives at the employer's business premises • Employer has a written policy prohibiting personal use, except de minimis use, such as driving to lunch while away from the office • Employer believes the vehicle is not used for any personal use (other than de minimis) Reg. ¢1.132-(5)(e) and (~; Reg. § 1.274-6T(a)(2) For vehicles not used for personal purposes other than commuting ($1.50 each way), the following conditions must apply: • For bona fide noncompensatory reasons, the employer requires the employee to commute to and/or from work in the vehicie • Vehicle is owned or leased by the employer • Vehicle is provided to the employee for business use • Employer requires the employee to commute in the vehicle for valid business reasons • Employer has a written policy prohibiting personal use other than commuting Employee does not use the vehicle for personal use Reg. § 1.274-6T(a)(3) 55 Written Policy Statements Erraployer must maintain a written policy statement that implements a policy restricting personal use ofemployer-provided vehicles. The Conference Report to P.L. 99-44, Contemporaneous Recordkeeping Requirements Repeal, states that a resolution of a city council, or a provision of state law, or the state constitution qualifies as a written policy statement for the safe harbor provisions. Employer Monitoring Required Although detailed recordkeeping is not required, the employer must have some way to prove that the vehicles are being used in accordance with the rules. For example, internal controls such as requiring employees using motor pools to sign the vehicle out, and signed statements by the employees agreeing to no personal use, or (if applicable) no personal use other than commuting. Example: An employer has a motor pool with vehicles that employees use on a daily basis, returning them at the end of the day. The employer does not have a written policy concerning personal use of the vehicle. The employees using the vehicles are not required to keep a record of use of the vehicles. The employer does not have a written policy in effect and therefore, does not meet the safe harbor substantiation rules. Since the employees do not keep records of use of the vehicles and the employer does not have a written policy prohibiting personal use, the value of the use is considered wages. Example: If the employer maintained a written policy prohibiting personal use of the vehicles and met all the safe harbor conditions of the regulations, none of the value of the use is taxable as a wage to the employees. If safe harbor substantiation rules are in effect, employees are not required to keep records of the use of the qualified vehicles. 56 Page 1 of 7 .ederal Register: June 9, 2008 (Volume 73, Number 111)] [proposed Rules] [Page 32500-32503] From the Federal Register Online via GPO Access [wais.access.gpo.gov] f" '^_ID: fr09jn08-15] ----------------------------------------------------------------------- DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG-106897-08] RIN 1545-BH65 Qualified Nonpersonal Use Vehicles AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. SUMMARY: This document contains proposed regulations relating to qualified nonpersonal use vehicles as defined in section 274(i). Qualified nonpersonal use vehicles are excepted from the substantiation requirements of section 274(d)(4) that apply to listed property as defined in section 280F(d)(4). These proposed regulations would add c'~arly marked public safety officer vehicles as a new type of c .ified nonpersonal use vehicles. These proposed regulations would affect employers that provide their employees with qualified nonpersonal use vehicles and the employees who use such vehicles. DATES: Written or electronic comments and requests for a public hearing must be received by September 8, 2008. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-106897-08), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-106897-08), Couriers Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. Additionally, taxpayers may submit electronic comments directly via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-106897-08). FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Don Parkinson or Selvan Boominathan at (202) 622-6040; concerning the submission of comments or requests for a hearing, Kelly Banks at (202) 622-36?_8 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains proposed Income Tax Regulations under sPCtion 274(i) added by section 2(b) of Public Law 99-44 (May 24, ~), which provides a definition of qualified nonpersonal use vctiicle. Temporary Regulation Sec. 1.274-5T(k), identifying categories of qualified nonpersonal use vehicles, was issued in TD 8061 (1982-2 CB 93 (1985)}. A notice of proposed rulemaking was issued by cross- http://frwebgate3.access. gpo.gov/cgi-bin/waisgate. cgi`? WAI SdocID=09682228956+4+0+0& WAISacti... 6/ 10/2008 Page 2 of 7 reference to Temporary Regulation Sec. 1.274-5T (k) (50 FR 46088, 1985- 2 CB 809 (1985)). These proposed regulations incorporate the text of Sec. 1.274-5T (k) and add clearly marked public safety officer vehicles as a new type of qualified nonpersonal use vehicle, listed along with ~ arly marked police and fire vehicles at Sec. 1.274-5(k)(2)(ii)(A). c. .arly marked public safety officer vehicles are added to the definition of clearly marked police and fire vehicles at Sec. 1.274- 5(k)(3), and an example is added at Sec. 1.274-5(k)(8). (See Sec. 601.601 (d) (2) (ii) (b) . ) Explanation of Provisions Section 274 (d) provides that a taxpayer is not allowed a deduction or credit for certain expenses unless the expense is substantiated. These substantiation requirements apply to expenses incurred in the of use of any listed property (defined in section 280F(d)(4)), which includes any passenger automobile and any other property used as a means of transportation. Section 274 (d) does not apply to any qualified nonpersonal use vehicle as defined in section 274(1). Section 274(1) provides that a qualified nonpersonal use vehicle is any vehicle which by reason of its nature is not likely to be used more than a de minimis amount for Aersonal uses. The legislative history to section 274(1) provided a list of qualified nonpersonal use vehicles and identified a number of examples of qualified nonpersonal use vehicles such as school buses, qualified specialized utility repair trucks, and qualified moving vans. The legislative history indicated that Congress wanted the Commissioner to expand the list to include other vehicles appropriate for listing because by their nature it is highly unlikely that they will be used more than a very minimal amount for personal purposes. H.R. Rep. No. 99-34, at it (1985). Passenger automobiles such as sedans and sport utility vehicles are ~ erally not exempt from taxation as qualified nonpersonal use ~ icles because by design they can easily be used for personal purposes. However, _unmarked law enforcement vehicles and clearly marked police and fire vehicles are included in the list of qualified nonpersona use vehicles set forth in the legislative history to section 274(1) and incorporated into the proposed and temporary regulations. e IRS and an [ [Page 32501] ] the Treasury Department have become aware of a need for additional category of vehicles to be included in the list of qualified nonpersonal use vehicles. Clearly marked vehicles provided to Federal, state and local government workers who respond to emergency situations do not satisfy the current regulations governing qualified nonpersonal use vehicles if the individual workers are not employed by either the fire department or police department. Accordingly, the proposed regulations add clearly marked public safety officer vehicles to the list of qualified nonpersonal use vehicles so that emergency responders receive the same treatment whether they work for the police department, fire department or another department of state or local government. A clearly marked public safety officer vehicle is a vehicle owned or leased by a governmental unit or any agency or instrumentality thereof, that is required to be used for commuting by a public safety officer as defined in section 402(1)(4)(C) who, when not on a regular shift, is on call at all times, provided that any personal use (other- t n commuting) of the vehicle outside the limit of the public safety icer obligation to respond to an emergency is prohibited by such governmental unit. A public safety officer vehicle is clearly marked if, through painted insignia or words, it is readily apparent that the vehicle is a public safety officer vehicle. ~..-____ http://frwebgate3.access.gpo.gov/cgi-bin/waisgate.cgi?WAISdocID=09682228956+4+0+0&WAISacti... 6/10/2008 Page 3 of 7 Section 402(1)(4)(c) provides that the term "public safety officer " shall have the same meaning given such term by the Omnibus Crime Control and Safe Streets Act of 1968, as codified at 42 U.S.C. 3796b(9)(A). 42 U.S.C. 3796b(9)(A) defines public safety officer as ' ~ individual serving a public agency in an official capacity, with o. rithout compensation, as a law enforcement officer, a firefighter, a chaplain, or as a member of a rescue squad or ambulance crew. " Proposed Sec. 1.274-5(k) and (1} provide a list of qualified nonpersonal use vehicles and related definitions. Section 1.274-5 (k) and (1) were originally proposed in 1985 (LR-145-84, 50 FR 46088, November 6, 1985) and simultaneously issued as a temporary regulation (TD 8061, 50 FR 46006, November 6, 1985). Paragraph (k) of LR-145-84 is being re-proposed, with amendments, as part of these proposed regulations. Paragraph (1) provides definitions of the terms "automobile, " "vehicle, " "employer, " "employee, " and "personal use. " Paragraph (1) is being re-proposed, with no changes, as part of these proposed regulations. The corresponding provisions of the proposed regulations in LR-145-84 are withdrawn upon publication of this notice. The corresponding provisions of the temporary regulations in TD 8061 will be withdrawn once these proposed regulations are published as final regulations in the Federal Register. Special Analyses It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that these regulations do not require a collection of information and do not impose any new or different requirements on sr ~1 entities. Therefore, a Regulatory Flexibility Analysis under the R .latory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805 (f) of the Internal Revenue Code, this notice of proposed rulemaking has been submitted to the Chief Council for Advocacy of the Small Business Administration for comment on its impact on small business. Comments and Requests for Public Hearings Before these proposed amendments are adopted, consideration will be given to any written comments that are submitted to CC:PA:LPD:PR (REG- 106897-08). All comments will be available for public inspection and copying. A public hearing will be scheduled and held upon written request by any person who submits written comments on the proposed regulation. Notice of the time and place for the hearing will be published in the Federal Register. Drafting Information The principal authors of these regulations are Don E. Parkinson and Selvan V. Boominathan, Office of the Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury Department participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. F osed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: ~, http://frwebgate3.access.gpo.gov/cgi-bin/waisgate.cgi?WAISdocID=09682228956+4+p+0&WAISacti... 6/10/2008 Page 4 of 7 PART 1--INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 Par. 2. Section 1.132-5 paragraph (h) is revised to read as follows: Sec. 1.132-5 Working condition fringes. (h) Qualified nonpersonal use vehicles--(1) In general. Except as provided in paragraph (h)(2) of this section, 100 percent of the value of the use of a qualified nonpersonal use vehicle (as described in Sec. 1.274-5(k)) is excluded from gross income as a working condition fringe, provided that, in the case of a vehicle described in Sec. 1.274-5(k)(3) through (8), the use of the vehicle conforms to the requirements of that paragraph. (2) Shared usage of qualified nonpersonal use vehicles. In general, a working condition fringe under this paragraph (h) is available to the driver and all passengers of a qualified nonpersonal use vehicle. However, a working condition fringe under this paragraph (h) is available only with respect to the driver and not with respect to any passengers of a qualified nonpersonal use vehicle described in Sec. 1.274-5 (k) (2) (ii) (L) or (P) . Par. 3. Section 1.274-5 paragraphs (k) and (1) and the last sentence of paragraph (m) are revised to read as follows: Sec. 1.274-5 Substantiation requirements. (k) Exceptions for qualified nonpersonal use vehicles--(1) In general. The substantiation requirements of section 274 (d) and this section do not apply to any qualified nonpersonal use vehicle (as defined in paragraph (k)(2) of this section). (2) Qualified nonpersonal use vehicle--(i) In general. For purposes of section 274 (d) and this section, the term qualified nonpersonal use vehicle means any vehicle which, by reason of its nature (that is, design), is not likel to be used more than a de minimis amount for personal purposes. (ii) List of vehicles. Vehicles which are qualified nonpersonal use vehicles include the following: (A) Clearly marked police, fire, and public safety officer vehicles (as defined and to the extent provided in paragraph (k)(3) of this section). (B) Ambulances used as such or hearses used as such. [[Page 32502]] (C) Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds. (D) Bucket trucks (cherry pickers). (E) Cement mixers. (F) Combines. (G) Cranes and derricks. (H) Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat. (I) Dump trucks (including garbage trucks). http://frwebgate3.access.gpo.gov/cgi-bin/waisgate.cgi?WAISdoc1D=09682228956+4+0+0&WAISacti... 6/10/2008 Page 5 of 7 (J) Flatbed trucks. (K) Forklifts. (L) Passenger buses used as such with a capacity of at least 20 passengers. (M) Qualified moving vans (as defined in paragraph (k)(4) of this s cion) . (N) Qualified specialized utility repair trucks (as defined in paragraph (k)(5) of this section). (O) Refrigerated trucks. (P) School buses (as defined in section 4221(d)(7)(c)). yy,~ (Q) Tractors and other special purpose farm vehicles. fdi(R) Unmarked vehicles used by law enforcement officers (as defined in paragraph (k)(6) of this section) if the use is officially ~--~ authorized. (S) Such other vehicles as the Commissioner may designate. (3) Clearly marked police, fire, or public safety officer vehicles. A police, fire, or public safety officer vehicle is a vehicle, owned or leased by a governmental unit, or any agency or instrumentality thereof, that is required to be used for commuting by a police officer, fire fighter, or public safety officer (as defined in section 402(1)(4)(C) of this chapter) who, when not on a regular shift, is on call at all times, provided that any personal use (other than commuting) of the vehicle outside the limit of the police officer's arrest powers or the fire fighter's or public safety officer's obligation to respond to an emergency is prohibited by such governmental unit. A police, fire, or public safety officer vehicle is clear y marked if, through painted insignia or words, it is readily apparent that the vehicle is a police, fire, or public safety officer vehicle. A marking on a license plate is not a clear marking for purposes of this paragraph (k). (4) Qualified moving van. The term qualified moving van means any Y ^_k or van used by a professional moving company in the trade or f mess of moving household or business goods if-- (i) No personal use of the van is allowed other than for travel to and from a move site (or for de minimis personal use, such as a stop for lunch on the way between two move sites); (ii) Personal use for travel to and from a move site is an irregular practice (that is, not more than five times a month on average); and (iii) Personal use is limited to situations in which it is more convenient to the employer, because of the location of the employee's residence in relation to the location of the move site, for the van not to be returned to the employer's business location. (5) Qualified specialized utility repair truck. The term qualified specialized utility repair truck means any truck (not including a van or pickup truck) specifically designed and used to carry heavy tools, testing equipment, or parts if-- (i) The shelves, racks, or other permanent interior construction which has been installed to carry and store such heavy items is such that it is unlikely that the truck will be used more than a de minimis amount for personal purposes; and (ii) The employer requires the employee to drive the truck home in order to be able to respond in emergency situations for purposes of restoring or maintaining electricity, gas, telephone, water, sewer, or steam utility services. (6) Unmarked law enforcement vehicles--(i) In general. The substantiation requirements of section 274 (d) and this section do not apply to officially authorized uses of an unmarked vehicle by a "law e--Forcement officer." . To qualify for this exception, any personal use ~ .: be authorized by the Federal, State, county, or local governmental agency or department that owns or leases the vehicle and employs the officer,~,~_d must be incident to law-enforcement functions, such as being able to report directly from home to a stakeout or surveillance _-.. http://frwebgate3.access.gpo.gov/cgi-bin/waisgate.cgi?WAI SdocID=09682228956+4+0+0&WAISacti... 6/10/2008 Page 6 of 7 site, or to an emergency situation. Use of an unmarked vehicle for ~r~~cation or recreation trips cannot qualify as an authorized use. (ii) Law enforcement officer. The term law enforcement officer means an individual who is employed on a full-time basis by a c ~rnmental unit that is responsible for the prevention or i astigation of crime involving injury to persons or property (including apprehension or detention of persons for such crimes), who is authorized by law to carry firearms, execute search warrants, and to make arrests (other than merely a citizen's arrest), and who regularly carries firearms (except when it is not possible to do so because of the requirements of undercover work). The term "law enforcement officer " may include an arson investigator if the investigator otherwise meets the requirements of this paragraph (k)(6)(ii), but does not include Internal Revenue Service special agents. (7) Trucks and vans. The substantiation requirements of section 274 (d) and this section apply generally to any pickup truck or van, unless the truck or van has been specially modified with the result that it is not likely to be used more than a de minimis amount for personal purposes. For example, a van that has only a front bench for seating, in which permanent shelving that fills most of the cargo area has been installed, that constantly carries merchandise or equipment, and that has been specially painted with advertising or the company's name, is a vehicle not likely to be used more than a de minimis amount for personal purposes. (8) Examples. The following examples illustrate the provisions of paragraphs {k)(3) and (6) of this section: Example 1. Detective C, who is a "law enforcement officer " employed by a state police department, headquartered in City M, is provided with an unmarked vehicle (equipped with radio communication) for use during off-duty hours because C must be able r ^ommunicate with headquarters and be available for duty at any t a (for example, to report to a surveillance or crime site). The police department generally has officially authorized personal use of the vehicle by C but has prohibited use of the vehicle for recreational purposes or for personal purposes outside the state. Thus, C's use of the vehicle for commuting between headquarters or a surveillance site and home and for personal errands is authorized personal use as described in paragraph (k)(6)(i) of this section. With respect to these authorized uses the vehicle is not subject to the substantiation requirements of section 274 (d) and the value of these uses is not included in C's gross income. Example 2. Detective T is a "law enforcement officer " employed by City M. T is authorized to make arrests only within M's city limits. T, along with all other officers of the force, is ordinarily on duty for eight hours each work day and on call during the other sixteen hours. T is provided with the use of a clearly marked police vehicle in which T is required to commute to his home in City M. The police department's official policy regarding marked police vehicles prohibits personal use (other than commuting) of the vehicles outside the city limits. When not using the vehicle on the job, T uses the vehicle only for commuting, personal errands on the way between work and home, and personal errands within City M. All use of the vehicle by T conforms to the requirements of paragraph (k)(3) of this section. Therefore, the value of that use is excluded from T's gross income as a working condition fringe and the vehicle is not subject to the substantiation requirements of section 274(d). Example 3. Director C is employed by City M as the director of r'-~ City's rescue squad and is provided with a vehicle for use in ponding to emergencies. The City's rescue [[Page 32503]] http://frwebgate3.access.gpo.gov/cgi-bin/waisgate.cgi?WAISdocID=09682228956+4+0+0&WAISacti... 6/I 0/2008 Page 7 of 7 squad is not a part of City M's police or fire departments. The director's vehicle is a sedan which is painted with insignia and words identifying the vehicle as being owned by the City's rescue squad. C, when not on a regular shift, is on call at all times. The C~ v's official policy regarding clearly marked public safety c lcer vehicles prohibits personal use (other than for commuting) of the vehicle outside of the limits of the public safety officer's obligation to respond to an emergency. When not using the vehicle to respond to emergencies, City M authorizes C to use the vehicle only for commuting, personal errands on the way between work and home, and personal errands within the limits of C's obligation to respond to emergencies. With respect to these authorized uses, the vehicle is not subject to the substantiation requirements of section 274 (d) and the value of these uses is not includable in C's gross income. (1) Definitions. For purposes of section 274 (d) and this section, the terms automobile and vehicle have the same meanings as prescribed in Sec. Sec. 1.61-21(d)(1)(ii) and 1.61-21(e)(2), respectively. Also, for purposes of section 274 (d) and this section, the terms employer, employee and personal use have the same meanings as prescribed in Sec. 1.274-6T(e). (m) * * * However, paragraph (j)(3) of this section applies to expenses paid or incurred after September 30, 2002, and paragraph (k) applies to clearly marked public safety officer vehicles, as defined in 1.274-5(k)(3), only with respect to uses occurring after January 1, 2009. Par. 4. Section 1.274-5T is revised by amending paragraphs (k) and (1) as follows: Sec. 1.274-5T Substantiation requirements (temporary). i * * * (k) and (1) [Reserved]. For further guidance, see Sec. Sec. 1.274- 5 (k) and (1) . * * * * * Par. 5. Section 1.280E-6 is amended by revising paragraph (b)(2)(ii) to read: Sec. 1.280E-6 Special rules and definitions. * * * * * (b) * * * (2) * * * (ii) Exception. The term "listed property " does not include any vehicle that is a qualified nonpersonal use vehicle as defined in section 274(i) and Sec. 1.274-5(k). * * * * * Steven Miller, Acting Deputy Commissioner for Services and Enforcement. (FR Doc. E8-12805 Filed 6-6-08; 8:45 am] BILLING CODE 4830-01-P http://fi-vvebgate3.access.gpo.gov/cgi-bin/waisgate.cgi?WAISdocID=09682228956+4+0+0&WAISacti... 6/ 10/2008 Department of the Treasury Internal Revenue Service Publication 15-8 Cat. No. 29744N Employer's Tax Guide to Fringe Benefits For use in 2®~8 Contents What's New ............................... 1 Reminders ................................ 2 Introduction .............................. 2 1. Fringe Benefit Overview ................... 2 Are Fringe Benefits Taxable? ............... 2 Cafeteria Plans .......................... 2 2. Fringe Benefit Exclusion Rules ............. 3 Accident and Health Benefits ............... 6 Achievement Awards ..................... 6 Adoption Assistance ...................... 7 Athletic Facilities ......................... 7 De Minimis (Minimal) Benefits ............... 8 Dependent Care Assistance ................ 8 Educational Assistance ................... 9 Employee Discounts ...................... 9 Employee Stock Options .................. 10 Group-Term Life Insurance Coverage ......... 10 Health Savings Accounts .................. 12 Lodging on Your Business Premises ......... 13 Meals ................................. 14 Moving Expense Reimbursements ........... 15 No-Additional-Cost Services ................ 16 Retirement Planning Services ............... 16 Transportation (Commuting) Benefits ......... 17 Tuition Reduction ........................ 18 Working Condition Benefits ................. 18 3. Fringe Benefit Valuation Rules ............. 19 General Valuation Rule ................... 20 Cents-Per-Mile Rule ...................... 20 Commuting Rule ......................... 21 Lease Value Rule ........................ 21 Unsafe Conditions Commuting Rule .......... 23 4. Rules for Withholding, Depositing, and Reporting ............................. 24 How To Get Tax Help ....................... 25 Index .................................... 28 What's New Cents-per-mile rule. The standard mileage rate you can use under the cents-per-mile rule to value the personal use of a vehicle you provide to an employee in 2008 is 50.5 cents per mile. See Cents-Per-Mile Rule in section 3. Increase in qualified parking exclusion and commuter transportation benefit. For 2008, the manthly exclusion for qualified parking increases to 5220 and the monthly exclusion for commuter highway vehicle transportation and transit passes increases to 5115. See Qualified Trans- portation Benefits on page t 7. Reminders Photographs of missing children. The Internal Reve- nue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publica- tion on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678} if you rec- ognize achild. Introduction This publication supplements Publication 15 (Circular E), Employer's Tax Guide, and Publication 15-A, Employer's Supplemental Tax Guide. It contains information for em- ployers on the employment tax trea#ment of fringe benefits. Comments and suggestions. We welcome your com- ments about this publication and your suggestions for future editions. You can write to us at the following address: Internal Revenue Service Business Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. NW, IR-6526 Washington, DC 20224 We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. You can email us at "taxformsC~irs.gov. (The asterisk must be included in the address.) Please put "Publications Comment" on the subject line. Although we cannot re- spond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products. 1. Fringe Benefit Overview A fringe benefit is a form of pay for the performance of services. For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work. Pefformance of services. A person who performs serv- ices for you does not have to be your employee. A person may perform services far you as an independent contrac- tor, partner, or director. Also; for fringe benefit purposes, treat a person who agrees not to perform services (such as under a covenant not to compete) as performing services. Provider of benefit. You are the provider of a fringe benefit if it is provided far services performed for you. You may be the provider of the benefit even if it was actually furnished by another person. You are the provider of a fringe benefit your client or customer provides to your employee for services the employee performs for you. Recipient of benefit. The person who performs services for you is the recipient of a fringe benefit provided for those services. That person may be the recipient even if the benefit is provided to someone who did not perform serv- ices for you. For example, your employee may be the recipient of a fringe benefit you provide to a member of the employee's family. Are Fringe Benefits Taxable? Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it. Section 2 discusses the exclusions that apply to certain fringe benefits. Any benefit not excluded under the rules discussed in section 2 is taxable. Including taxable benefits in pay. You must include in a recipient's pay the amount by which the value of a fringe benefit is more than the sum of the following amounts. • Any amount the law excludes from pay. • Any amount the recipient paid for the benefit. The rules used to determine the value of a fringe benefit are discussed in section 3. If the recipient of a taxable fringe benefit is your em- ployee, the benefit is subject to employment taxes and must be reported on Form W-2, Wage and Tax Statement. However, you can use special rules to withhold, deposit, and report the employment taxes. These rules are dis- cussed in section 4. If the recipient of a taxable fringe benefit is not your employee, the benefit is not subject to employment taxes. However, you may have to report the benefit on one of the following information returns. If the recipient receives the benefit as: Use: An independent contractor Form 1099-MISC A partner Schedule K-1 {Form 1065) For more information, see the instructions for the forms listed above. Cafeteria Plans A cafeteria plan, including a flexible spending arrange- ment, is a written plan that allows your employees to choose between receiving cash or taxable benefits instead of certain qualified benefits for which the law provides an exclusion from wages. If an employee chooses to receive a qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead will not make the qualified benefit taxable. Generally, a cafeteria plan does not include any plan that offers a benefit that defers pay. However, a cafeteria plan can include a qualified 401(k) plan as a benefit. Also, certain life insurance plans maintained by educational in- stitutions car, be offered as a benefit even though they defer pay. Page 2 Publication 15-B (2008) Qualified benefits. A cafeteria plan can include the fol- lowing benefits discussed in section 2. • Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance). • Adoption assistance. • Dependent care assistance. • Group-term life insurance coverage (including costs that cannot be excluded from wages). • Health savings accounts (HSAs). Distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care serv- ices. Benefits not allowed. A cafeteria plan cannot include the following benefits discussed in section 2. • Archer MSAs. (See Accident and Health Benefits.) • Athletic facilities. • De minimis (minimal) benefits. • Educational assistance. • Employee discounts. • Lodging on your business premises. • Meals. • Moving expense reimbursements. • No-additional-cost services. • Transportation (commuting) benefits. • Tuition reduction. • Working condition benefits. It also cannot include scholarships or fellowships (dis- cussed in Publication 970, Tax Benefits for Education). Employee. For these plans, treat the following individuals as employees. • A curren# common-law employee (see section 2 in Publication 15 (Circular E) for more information}. • A full-time life insurance agent who is a current stat- utory employee. • A leased employee who has provided services to you on a substantially full-time basis for at least a year i# the services are performed under your pri- mary direction or control. Exception for S corporation shareholders. Do not treat a 2°'° shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder for this purpose is someone who directly or indirectly owns (at any time during the year} more than 2% of the corpora- tion's stock or stock with more than 2% of the voting power. Treat a 2°% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2°i° share- holder. Plans that favor highly compensated employees. If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you must include in their wages the value of taxable benefits they could have selected. A plan you maintain under a collec- tive bargaining agreement does not favor highly compen- sated employees. A highly compensated employee for this purpose is any of the following employees. 1. An officer. 2. A shareholder who owns more than 5% of the voting power or value of all classes of the employer's stock. 3. An employee who is highly compensated based on the facts and circumstances. 4. A spouse or dependent of a person described in (1), (2), or (3). Plans that favor key employees. If your plan favors key employees, you must iriclude in their wages the value of taxable benefits they could have selected. A plan favors key employees if more than 25% of the total of the nontax- able benefits you provide for all employees under the plan go to key employees. However, a plan you maintain under a collective bargaining agreement does not favor key em- ployees. A key employee during 2008 is generally an employee who is either of the following. 1. An officer having annual pay of more than 5150,000. 2. An employee who for 2008 was either of the follow- ing. a. A 5% owner of your business. b. A 1 % owner of your business whose annual pay was more than $150,000. More information. For more information about cafeteria plans, see section 125 of the Internal Revenue Code and its regulations. 2. Fringe Benefit Exclusion Rules This section discusses the exclusion rules that apply to fringe benefits. These rules exclude all or part of the value of certain benefits from the recipient's pay. The excluded benefits are not subject to federal income tax withholding. Also, in most cases, they are not subject to social security, Medicare, or federal unemployment (FUTA) tax and are not reported on Form W-2. Publication 15-B (2008) Page 3 This section discusses the exclusion rules for the follow- ing fringe benefits. • Accident and health benefits. • Achievement awards. • Adoption assistance. • Athletic facilities. • De minimis (minimal} benefits. • Dependent care assistance. • Educational assistance. • Employee discounts. • Employee stock options. • Group-term life insurance coverage. • Health savings accounts (HSAs). • Lodging on your business premises. • Meals. • Moving expense reimbursements. • No-additional-cost services. • Retirement planning services. • Transportation (commuting) benefits. • Tuition reduction. • Working condition benefits. See Table 2-1 for an overview of the employment tax treatment of these benefits. Page 4 Publication 15-8 (2008) Table 2-1. Special Rules for Various Types of Fringe Benefits (For more information, see the full discussion in this section.) Treatment Under Employment Taxes Type of Fringe Benefit Income Tax Withholding Social Security and Medicare Federal Unemployment (FUTA) Exempt'•2, except for long-term Exempt, except for certain Exempt Accident and health benefits care benefits provided through a payments to S corporation flexible spending or similar employees who are 2°ia arrangement. shareholders. Achievement awards Exempt' up to $i ,600 for qualified plan awards ($400 for nonqualified awards}. Adoption assistance Exempt'~3 Taxable Taxable Exempt if substantially all use during the calendar year is by employees, their spouses and their Athletic facilities , dependent children and the facility is operated by the employer on premises owned or leased by the employer. De minimis (minimal) benefits Exempt Exempt Exempt Dependent care assistance Exempt3 up to certain limits, $5,000 ($2,500 for married employee filing separate return). Educational assistance Exempt up to $5,250 of benefits each year. (See Educational Assistance, later.) Employee discounts Exempt3 up to certain limits. (See Employee Discounts, later.) Employee stock options See Employee Stock Options, later. Group-term life insurance Exempt Exempt'~4 up to cost of $50,000 Exempt coverage of coverage. (Special rules apply to former employees.) Health savings accounts (HSAs) Exempt for qualified individuals up to the HSA contribution limits. (See Neaifh Savings Accounts, later.) Lodging on your business Exempt' if furnished for your convenience as a condition of employment. premises i i ! Meats Exempt if furnished on your business premises for your convenience. Exempt if de minimis. Moving expense reimbursements Exempt' if expenses would be deductible if the employee had paid them. No-additional-cost services Exempt3 Exempt3 Exempt3 Retirement planning Exempts Exempts Exempts services :' Transportation (commuting) ; Exempt' up to certain limits if for rides in a commuter highway vehicle and/or transit passes ($115). or qualified parking ($220). (See Transportation (Commuting) Benefits later.) benefits , Exempt if de minimis. Tuition reduction Exempt3 if for undergraduate education {or graduate education if the employee performs teaching or research activities}. Working condition benefits Exempt Exempt Exempt j 'Exemption does not apply to S corporation employees who are 2°a shareholders. I. ~ Exemption does not apply to certain highly compensated employees under aself-insured lan that favors Th l p ose emp oyees. I 'Exemption does not apply to certain highly compensated employees under a program that favors those employees. ° Exemption does not apply to certain key employees under a plan that favors those employees . - Exemption does not apply to services for tax preparation, accounting, legal, or brokerage services. Publication 15-8 (2008) Page 5 Accident and Health Benefits This exclusion applies to contributions you make to an accident or health plan for an employee, including the following. • Contributions to the cost of accident or health insur- ance including qualified long-term care insurance. • Contributions to a separate trust or fund that directly or through insurance provides accident or health benefits. • Contributions to Archer MSAs or health savings ac- counts {discussed in Publication 969, Health Sav- ings Accounts and Other Tax-Favored Health Plans). This exclusion also applies to payments you directly or indirectly make to an employee under an accident or health plan for employees that are either of the following. • Payments or reimbursements of medical expenses. • Payments for specific injuries or illnesses (such as the loss of The use of an arm or leg). The payments must be figured without regard to any period of ab- sence from work. Accident or health plan. This is an arrangement that provides benefits for your employees, their spouses, and their dependents in the event of personal injury or sick- ness. The plan may be insured or noninsured and does not need to be in writing. Employee. For this exclusion, treat the following individu- als as employees. • A current common-law employee. • A full-time life insurance agent who is a current stat- utory employee. • A retired employee. • A former employee you maintain coverage for based on the employment relationship. • A widow or widower of an individual who died while an employee. • A widow or widower of a retired employee. • For the exclusion of`contributions to an accident or health plan, a leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control. Exception for S corporation shareholders. Do not treat a 2°~o shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder is someone who directly or indirectly owns (at any time dur- ing the year} more than 2°% of the corporation's stock or stock with more than 2°i° of the voting power. Treat a 2°0 shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Exclusion from wages. You can generally exclude the value of accident or health benefits you provide to an employee from the employee's wages. Exception for certain long-term care benefits. You cannot exclude contributions to the cost of long-term care insurance from an employee's wages subject to federal income tax withholding if the coverage is provided through a flexible spending or similar arrangement. This is a benefit program that reimburses specified expenses up to a maxi- mum amount that is reasonably available to the employee and is less than five times the total cost of the insurance. However, you can exclude these contributions from the employee's wages subject to social security, Medicare, and federal unemployment (FUTA} taxes. S corporation shareholders. Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide to the employee in the em- ployee's wages subject to federal income tax withholding. However, you can exclude the value of these benefits (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes. Exception for highly compensated employees. If your plan is aself-insured medical reimbursement plan that favors high-y compensated employees, you must in- clude all or part of the amounts you pay to these employ- ees in their wages subject to federal income tax withholding. However, you can exclude these amounts (other than payments for specific injuries or illnesses) from the employee's wages subject to social security, Medicare, and FUTA taxes. A self-insured plan is a plan that reimburses your em- ployees for medical expenses not covered by an accident or health insurance policy. A highly compensated employee for this exception is any of the following individuals. • One of the five highest paid officers. • An employee who owns {directly or indirectly) more than 10°'° in value of the employer's stock. • An employee who is among the highest paid 25% of all employees (other than those who can be ex- cluded from the plan). For more information on this exception, see section 105(h) of the Internal Revenue Code and its regulations. COBRA premiums. The exclusion for accident and health benefits applies to amounts you pay to maintain medical coverage far a former employee under the Com- bined Omnibus Budget Reconciliation Act of 1986 (CO- BRA). The exclusion applies regardless of the length of employment, whether you directly pay the premiums or reimburse the former employee for premiums paid, and whether the employee's separation is permanent or tem- porary. Achievement Awards This exclusion applies to the value of any tangible personal property you give to an employee as an award for either length of service or safety achievement. The exclusion Page 6 Publication 15-B (2008) does not apply to awards of cash, cash equivalents, gift certificates, or other intangible property such as vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, and other securities. The award must meet the requirements for employee achievement awards dis- cussed in chapter 2 of Publication 535, Business Ex- penses. Employee_ For this exclusion, treat the following individu- als as employees. • A current employee. • A former common-law employee you maintain cover- age for in consideration of or based on an agree- ment relating to prior service as an employee. • A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your pri- mary direction or control. Exception for S corporation shareholders. Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder is someone who directly or indirectly awns (at any time dur- ing the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Exclusion from wages. You can generally exclude the value of achievement awards you give to an employee from the employee's wages if their cost is not more than the amount you can deduct as a business expense for the year. The excludable annual amount is $1,600 ($400 for awards that are not "qualified plan awards"). See chapter 2 of Publication 535 for more information about the limit on deductions for employee achievement awards. To determine for 2008 whether an achievement award is a `qualified plan award" under the de- duction rules described in Publication 535, treat any employee who received more than $100,OD0 in pay for 2007 as a highly compensated employee. If the cost of awards given to an employee is more than your allowable deduction, include in the employee's wages the larger of the following amounts. • The part of the cost that is more than your allowable deduction (up to the value of the awards). • The amount by which the value of the awards ex- ceeds your allowable deduction. Exclude the remaining value of the awards from the em- p{oyee's wages. Adopti®n Assistance An adoption assistance program is a separate written plan of an employer that meets ail of the following requirements. 1. It benefits employees who qualify under rules set up by you, which do not favor highly compensated em- ployees or their dependents. To determine whether your plan meets this test, do not consider employees excluded from your plan who are covered by a col- lective bargaining agreement, if there is evidence that adoption assistance was a subject of good-faith bargaining. 2. It does not pay more than 5% of its payments during the year for shareholders or owners (or their spouses or dependents). A shareholder or owner is someone who owns (on any day of the year} more than 5% of the stock or of the capital or profits interest of your business. 3. You give reasonable notice of the plan to eligible employees. 4. Employees provide reasonable substantiation that payments or reimbursements are for qualifying ex- penses. For this exclusion, a highly compensated employee for 2008 is an employee who meets either of the following tests. 1. The employee was a 5% owner at any time during the year or the preceding year. 2. The employee received more than $100,000 in pay for the preceding year. You can choose to ignore test (2) if the employee was not also in the top 20% of empioyees when ranked by pay for the preceding year. You must exclude all payments or reimbursements you make under an adoption assistance program for an em- ployee's qualified adoption expenses from the employee's wages subject to federal income tax withholding. However, you cannot exclude these payments from wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. For more information, see the Instructions for Form 8839, Qualified Adoption Expenses. You must report all qualifying adoption expenses you paid or reimbursed under your adoption assistance pro- gram for each employee for the year in box 12 of the employee's Form W-2. Use code "T" to identify this amount. Exception for S corporation shareholders. For this ex- clusion, do not treat a 2°i° shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who directly or indirectly owns (at any time dur- ing the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes including using the benefit as a reduction in distributions to the 2°rd shareholder. Athletic Facilities You can exclude the value of an employee's use of an on-premises gym or other athletic facility you operate from an employee's wages if substantially all use of the facility during the calendar year is by your employees, their spouses, and their dependent children. For this purpose, an employee's dependent child is a child or stepchild who is the employee's dependent or who, if both parents are deceased, has not attained the age of 25. On-premises facility. The athletic facility must be located on premises you own or lease. It does not have to be Publication 15-8 (2008) Page 7 located on your business premises. However, the exclu- sion does not apply to an athletic facility for residential use, such as athletic facilities that are part of a resort. Employee. For this exclusion, treat the following individu- als as employees. • A current employee. • A former employee who retired or left on disability. • A widow or widower of an individual who died while an employee. • A widow or widower of a former employee who re- tired or left on disability. • A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your pri- mary direction or control. • A partner who performs services for a partnership. De Minimis (Minimal) Benefits You can exclude the value of a de minimis benefit you provide to an employee from the employee's wages. A de minimis benefit is any property or service you provide to an employee that has so little value (taking into account how frequently you provide similar benefits to your employees) that accounting for it would be unreasonable or administra- tively impracticable. Cash and cash equivalent fringe ben- efits (for example, use of gift card, charge card, or credit card), no matter how little, are never excludable as a de minimis benefit, except for occasional meal money or transportation fare. Examples of de minimis benefits include the following. • Occasional personal use of a company copying ma- chine if you sufficiently control its use so that at least 85% of its use is for business purposes. • Holiday gifts, other than cash, with a low fair market value. • Group-term life insurance payable on the death of an employee's spouse or dependent if the face amount is not more than $2,000. • Meals. See Meals, later. • Occasional parties or picnics for employees and their guests. • Occasional tickets for entertainment or sporting events. • Transportatian fare. See Transportation (Commut- ing) Benefits, later. Employee. For this exclusion, treat any recipient of a de minimis benefit as an employee. Dependent Care Assistance This exclusion applies to household and dependent care services you directly or indirectly pay fior or provide to an employee under a dependent care assistance program that covers only your employees. The services must be for a qualifying person's care and must be provided to allow the employee to work. These requirements are basically the same as the tests the employee would have to meet to claim the dependent care credit if the employee paid for the services. For more information, see Qualifying Person Test and Work-Related Expense Test in Publication 503, Child and Dependent Care Expenses. Employee. For this exclusion, treat the following individu- als as employees. • A current employee. • A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your pri- mary direction or control. • Yourself (if you are a sole proprietor}. • A partner who performs services for a partnership. Exclusion from wages. You can exclude the value of benefits you provide to an employee under a dependent care assistance program from the employee's wages if you reasonably believe that the employee can exclude the benefits from gross income. An employee can generally exclude from gross income up to $5,000 of benefits received under a dependent care assistance program each year. This limit is reduced to $2,500 for married employees filing separate returns. However, the exclusion cannot be more than the earned income of either: • The employee, or • The employee's spouse. Special rules apply to determine the earned income of a spouse who is either a student or not able to care for himself or herself. For more information on the earned income limit, see Publication 503. Exception fer highly compensated employees. You cannot exclude dependent care assistance from the wages of a highly compensated employee unless the ben- efits provided under the program do not favor highly com- pensated employees and the program meets the requirements described in section 129(d) of the Internal Revenue Code. For this exclusion, a highly compensated employee for 2008 is an employee who meets either of the following tests. 1. The employee was a 5°~0 owner at any time during the year or the preceding year. 2. The employee received more than $100,000 in pay for the preceding year. You can choose to ignore test (2) if the employee was not also in the tap 20°'b of employees when ranked by pay for the preceding year. Form W-2. Report the value of all dependent care assis- tance you provide to an employee under a dependent care assistance program in box i 0 of the employee's Form W-2. Include any amounts you cannot exclude from the em- ployee's wages in boxes 1, 3, and 5. Page 8 Publication 15-B (2008) Educational Assistance This exclusion applies to educational assistance you pro- vide to employees under an educational assistance pro- gram. The exclusion also applies to graduate level courses. Educational assistance means amounts you pay or in- cur for your employees' education expenses. These ex- penses generally include the cost of books, equipment, fees, supplies, and tuition. However, these expenses do not include the cost of a course or other education involy- ing sports, games, ar hobbies, unless the education: • Has a reasonable relationship to your business, or • Is required as part of a degree program. Education expenses do not include the cost of tools or supplies (other than textbooks) your employee is allowed to keep at the end of the course. Nor do they include the cost of lodging, meals, or transportation. Educational assistance program. An educational assis- tance program is a separate written plan that provides educational assistance only to your employees. The pro- gram qualifies only if all of the following tests are met. • The program benefits employees who qualify under rules set up by you that do not favor highly compen- sated employees. To determine whether your pro- gram meets this test, do not consider employees excluded from your program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining. • The program does not provide more than 5% of its benefits during the year for shareholders or owners. A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. • The program does not allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance. • You give reasonable notice of the program to eligible employees. Your program can cover former employees if their employ- ment is the reason for the coverage. For this exclusion, a highly compensated empioyee for 2008 is an employee who meets either of the following tests. 1. The employee was a 5°i° owner at any time during the year or the preceding year. 2. The employee received more than $100,000 in pay for the preceding year. You can choose to ignore test (2) if the employee was not also in the top 20°i° of employees when ranked by pay for the preceding year. Employee. For this exclusion, treat the following individu- als as employees. • A current employee. • A former employee who retired, lefit on disability, or was laid off. • A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your pri- mary direction or control. • Yourself (if you are a sole proprietor). • A partner who performs services for a partnership. Exclusion from wages. You can exclude up to X5,250 of educational assistance you provide to an employee under an educational assistance program from the employee's wages each year. Assistance over $5,250. If you do not have an educa- tional assistance plan, or you provide an employee with assistance exceeding $5,250, you can exclude the value of these benefits from wages if they are working condition benefits. Property or a service provided is a working condi- tion benefit to the extent that if the employee paid for it, the amount paid would have been deductible as a business or depreciation expense. See Working Condition Benefits, later. Employee Discounts This exclusion applies to a price reduction you give an employee on property or services you offer to customers in the ordinary course of the line of business in which the employee performs substantial services. However, it does not apply to discounts on real property or discounts on personal property of a kind commonly held for investment {such as stocks or bonds). Employee. For this exclusion, treat the following individu- als as employees. • A current employee. • A former employee who retired or left on disability. • A widow or widower of an individual who died while an employee. • A widow or widower of an employee who retired or left on disability. • A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your pri- mary direction or control. • A partner who performs services for a partnership. Exclusion from wages. Yau can generally exclude the value of an employee discount you provide an empioyee from the employee's wages, up to the following limits. • For a discount on services, 20°ro of the price you charge nonemployee customers for the service. • For a discount on merchandise or other property, your gross profit percentage times the price you charge nonemployee customers for the property. Determine your gross profit percentage in the line of business based on all property you offer to customers Publication 15-B (2008) Page 9 (including employee customers) and your experience dur- ing the tax year immediately before the tax year in which the discount is available. To figure your gross profit per- centage, subtract the total cost of the property from the total sales price of the property and divide the result by the total sales price of the property. Exception for highly compensated employees. You cannot exclude from the wages of a highly compensated employee any part of the value of a discount that is not available on the same terms to one of the following groups. • All of your employees. • A group of employees defined under a reasonable classification you set up that does not favor highly compensated employees. For this exclusion, a highly compensated employee for 2008 is an employee who meets either of the following tests. 1. The employee was a 5°% owner at any time during the year or the preceding year. 2. The employee received more than $100,000 in pay for the preceding year. You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Employee Stock Options There are three kinds of stock options-incentive stock options, employee stock purchase plan options, and non- statutory (nonqualified) stock options. Wages for social security, Medicare, and federal unem- ploymenttaxes (FUTA) do not include remuneration result- ing from the exercise after October 22, 2004, of an incentive stock option or under an employee stock purchase plan option, or from any disposition of stock acquired by exercising such an option. The IRS will not apply these taxes to an exercise before October 23, 2004, of an incentive stock option or an employee stack purchase plan option or to a disposition of stock acquired by such exercise. Additionally, federal income tax withholding is not re- quired on the income resulting from a disqualifying disposi- tion of stock acquired by the exercise after October 22, 2004, of an incentive stock option or under an employee stock purchase plan option, or on income equal to the discount portion of stock acquired by the exercise, after October 22, 2004, of an employee stock purchase plan option resulting from any disposition of the stock. The IRS will not apply federal income tax withholding upon the disposition of stock acquired by the exercise, before Octo- ber 23, 2004, of an incentive stock option or an employee stock purchase plan option. However, the employer must report as income in box 1 of Form W-2, (a) the discount portion of stock acquired by the exercise of an employee stock purchase plan option upon disposition of the stock, and (b) the spread (between the exercise price and the fair market value of the stock at the time of exercise) upon a disqualifying disposition of stock acquired by the exercise of an incentive stock option or an employee stock purchase plan option. An employer must report the excess of the fair market value of stock received upon exercise of a nonstatutory stock option over the amount paid for the stock option on Form W-2 in boxes 1, 3 (up to the social security wage base), 5, and in box 12 using the code "V." See Regula- tions section 1.83-7. An employee who transfers his or her interest in non- statutory stock options to the employee's former spouse incident to a divorce is not required to include an amount in gross income upon the transfer. The former spouse, rather than the employee, is required to include an amount in gross income when the former spouse exercises the stock options. See Revenue Ruling 2002-22 and Revenue Rul- ing 2004-60 for details. You can find Rev. Rul. 2002-22 on page 849 of Internal Revenue Bulletin 2002-19 at www.irs. gov/pub/irs-irbs/irb02-79.pdf. You can find Rev. Rul. 2004-60 on page 1051 of Internal Revenue Bulletin 2004-24 at www.irs.gov/pub/irs-irbs/irb04-24.pdf. For more information about employee stock options, see sections 421, 422, and 423 of the internal Revenue Code and the related regulations. Group-Term Life Insurance Coverage This exclusion applies to life insurance coverage that meets all the following conditions. • It provides a general death benefit that is not in- cluded in income. • You provide it to a group of employees. See The 10-employee rule below. • It provides an amount of insurance to each em- ployee based on a formula that prevents individual selection. This formula must use factors such as the employee's age, years of service, pay, or position. • You provide it under a policy you directly or indirectly carry. Even if you do not pay any of the policy's cost, you are considered to carry it if you arrange for payment of its cost by your employees and charge at least one employee less than, and at least one other employee more than, the cost of his or her insur- ance. Determine the cost of the insurance, for this purpose, as explained under Coverage over the limit, later. Group-term life insurance does not include the following insurance. • Insurance that does not provide general death bene- fits, such as travel insurance or a policy providing only accidental death benefits. • Life insurance on the life of your employee's spouse or dependent. However, you may be able to exclude the cost of this insurance from the employee's wages as a de minimis benefit. See De Minimis (Minima!) Benefits, earlier. • Insurance provided under a policy that provides a permanent benefit (an economic value that extends beyond 1 poiicy year, such as paid-up or cash sur- rendervalue), unless certain requirements are met. See Regulations section 1.79-1 for details. Page 10 Publication 15-B (2008) Employee. For this exclusion, treat the following individu- als as employees. 1. A current common-law employee. 2. A full-time life insurance agent who is a current statu- tory employee. 3. An individual who was formerly your employee under (1) or (2), above. 4. A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direc- tion and control. Exception for S corporation shareholders. Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder is someone who directly or indirectly owns (at any time dur- ing the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. The 10-employee rule. Generally, life insurance is not group-term life insurance unless you provide it to at least 10 full-time employees at some time during the year. For this rule, count employees who choose not to re- ceive the insurance unless, to receive it, they must contrib- ute to the cost of benefits other than the group-term life insurance. For example, count an employee who could receive insurance by paying part of the cost, even if that employee chooses not to receive it. However, do not count an employee who must pay part or all of the cost of permanent benefits to get insurance, unless that employee chooses to receive it. Exceptions. Even if you do not meet the 10-employee rule, two exceptions allow you to treat insurance as group-term life insurance. Under the first exception, you do not have to meet the 10-employee rule if all the following conditions are met. 1. If evidence that the employee is insurable is re- quired, it is limited to a medical questionnaire (com- pleted by the employee) that does not require a physical. 2. You provide the insurance to all your full-time em- ployees or, if the insurer requires the evidence men- tioned in (1), to all full-time employees who provide evidence the insurer accepts. 3. You figure the coverage based on either a uniform percentage of pay or the insurer's coverage brackets that meet certain requirements. See Regulations section 1.79-1 for details. Under the second exception, you do not have to meet the 10-employee rule if all the following conditions are met. • You provide the insurance under a common plan covering your empleyees and the employees of at least one other emplcyer who is not related to you. • The insurance is restricted to, but mandatory for, all your employees who belong to, or are represented by, an organization (such as a union) that carries on substantial activities besides obtaining insurance. • Evidence of whether an employee is insurable does not affect an employee's eligibility for insurance or the amount of insurance that employee gets. To apply either exception, do not consider employees who were denied insurance for any of the following rea- sons. • They were 65 or older. • They customarily work 20 hours or less a week or 5 months or less in a calendar year. • They have not been employed for the waiting period given in the policy. (This waiting period cannot be more than 6 months.) Exclusion from wages. You can generally exclude the cost of up to $50,000 of group-term life insurance from the wages of an insured employee. You can exclude the same amount from the employee's wages when figuring social security and Medicare taxes. In addition, you do not have to withhold federal income tax or pay FUTA tax on any group-term life insurance you provide to an employee. Coverage over the limit. You must include in your employee's wages subject to social security and Medicare taxes the cost of group-term life insurance that is more than the cost of $50,000 of coverage, reduced by the amount the employee paid toward the insurance. Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Also, show it in box 12 with code "C." Figure the monthly cost of the insurance to include in the employee's wages by multiplying the number of thousands of dollars of insurance coverage over $50,000 (figured to the nearest $100) by the cost shown in the following table. Use the employee's age on the last day of the tax year. You must prorate the cost from the table if less than a full month of coverage is involved. Table 2-2. Cost Per $1,000 of Protection For 1 Month A~ Cast Under25 .................... ............... $.05 25 through 29 ................. ............... .06 30 through 34 ................. ............... .08 35 through 39 ................. ............... .09 40 through 44 ................. ............... .10 45 through 49 ................. ............... .15 50 through 54 ................. ............... .23 55 through 59 ................. ............... .43 60 through 64 ................. ............... .66 65 through 69 ................. ............... 1.27 70 and older .................. ............... 2.06 You figure the total cost to include in the employee's wages by multiplying the monthly cost by the number cf full months' coverage at that cost. Example. Tom's employer provides him with group-term life insurance coverage of 5200,000. Tom is 45 years old, is not a key employee, and pays 5100 per year toward the cost of the insurance. Tom's employer must include 5170 in his wages. The $200,000 of insurance coverage is reduced by $50,000. The total cost of $150,000 of coverage is $270 ($.15 x 150 x 12), and is reduced by the $100 Tom pays for the insurance. The Publication 15-B (2008) Page 11 employer includes $170 in boxes 1, 3, and 5 of Tom's Form W-2. The employer also enters $170 in box 12 with code "C." Coverage for dependents. Group-term life insurance coverage paid by the employer for the spouse or depen- dents of an employee may be excludable from income as a de minimis fringe benefit if the face amount is not more than $2,000. The part of this coverage that the employee paid on an after-tax basis is also excludable from income. For this purpose, the cost is figured using the monthly cost table above. Former employees. For group-term life insurance over $50,000 provided to former employees (including retirees), the former employees must pay the employee's share of social security and Medicare taxes with their federal in- come tax returns. You are not required to collect those taxes. Use the table above to determine the amount of social security and Medicare taxes owed by the former employee for coverage provided after separation from service. Report those uncollected amounts separately in box 12 on Form W-2 using codes "M" and "N." See the Instructions for Forms W-2 and W-3. Exception for key employees. Generally, if your group-term life insurance plan favors key employees as to participation or benefits, you must include the entire cost of the insurance in your key employees' wages. (This excep- tion generally does not apply to church plans.) When figuring social security and Medicare taxes, you must also include the entire cost in the employees' wages. Include the cost in boxes 1, 3, and 5 of Form W-2. However, you do not have to withhold federal income tax or pay FUTA tax on the cost of any group-term life insurance you provide to an employee. For this purpose, the cost of the insurance is the greater of the following amounts. • The premiums you pay for the employee's insur- ance. See Regulations section 1.79-4T (Q-6} for more information. • The cost you figure using the Table 2-2. For this exclusion, a key employee during 2008 is an employee or former employee who is one of the following individuals. See section 416(i) of the Internal Revenue Code for more information. 1. An officer having annual pay of more than $150,000 2. An individual who for 2008 was either of the fallow- ing. a. A 5°~o owner of your business. b. A 1 °~o owner of your business whose annual pay was more than ~ $150,000. A former employee who was a key employee upon retirement or separation from service is also a key em- ployee. Your plan does not flavor key employees as to partici- pation if at least one of the following is true. • It benefits at least 70% of your employees. • At least 85°ro of the participating employees are not key employees. • It benefits employees who qualify under a set of rules you set up that do not favor key employees. Your plan meets this participation test if it is part of a cafeteria plan {discussed in section 1 } and it meets the participation test for those plans. When applying this test, do not consider employees who: • Have not completed 3 years of service • Are part-time or seasonal, • Are nonresident aliens who receive no U.S. source earned income from you; or • Are not included in the plan but are in a unit of employees covered by a collective bargaining agree- ment, if the benefits provided under the plan were the subject of good-faith bargaining between you and employee representatives. Your plan does not favor key employees as to benefits if all benefits available to participating key employees are also available to all other participating employees. Your plan does not favor key employees just because the amount of insurance you provide to your employees is uniformly related to their pay. S corporation shareholders. Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the cost of all group-term life insurance coverage you provide the 2% shareholder in his or her wages. When figuring social security and Medicare taxes, you must also include the cost of this coverage in the 2% shareholder's wages. Include the cost in boxes 1, 3, and 5 of Form W-2. How- ever, you do not have to withhold federal income tax or pay federal unemployment tax on the cost of any group-term life insurance coverage you provide to the 2% shareholder. Health Savings Accounts A Health Savings Account (HSA) is an account owned by a qualified individual who is generally your employee or former employee. Any contributions that you make to an HSA become the employee's property and cannot be with- drawn by you. Contributions to the account are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. The medi- cal expenses must not be reimbursable by insurance or other sources and their payment from HSA funds (distribu- tion) will not give rise to a medical expense deduction on the individual's federal income tax return. For more infor- mation about HSAs, visit the Department of Treasury's website at www.treas.gov/offices/public-affairs/hsa. Eligibility. A qualified individual must be covered by a High Deductible Health Plan {HDHP) and not be covered by other health insurance except for permitted insurance listed under section 223(c)(3) or insurance for accidents, disability, dental care, vision care, or long-term care. For calendar year 2008, a qualifying HDHP must have a de- ductible of at least $1,100 for self-only coverage or $2,200 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $5,600 for self-only cover- age and $11,200 for family coverage. Page 12 Publication 15-B (2008) There are no income limits that restrict an individual's eligibility to contribute to an HSA nor is there a requirement that the account owner have earned income to make a contribution. Exceptions. An individual is not a qualified individual if he or she can be claimed as a dependent on another person's tax return. Also, an employee's participation in a health flexible spending arrangement (FSA) or health reimburse- mentarrangement (HRA) generally disqua{hies the individ- ual (and employer) from making contributions to his or her HSA. Employer contributions. Up to specified dollar limits, you can generally exclude your contributions (must be in cash) to the Health Savings Account (HSA) of a qualified individual (determined monthly) from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. For calendar year 2008, you can contribute up to 82,900 for self-only coverage or $5,800 for family coverage to a qualified individual's HSA. The contribution amount determined above is increased 8900 for 2008 for qualified individuals who are age 55 or older at any time during the year. No contributions can be made to an individual's HSA after he or she becomes enrolled in Medicare Part A or Part S. The maximum annual contribution (including ad- ditional amount for individuals who are age 55 or older) must be reduced to reflect any portion of the year during which the individual was not a qualified individual. Nondiscrimination rules. Your contribution amount to an employee's HSA must be comparable for all employees who have comparable coverage during the same period. Otherwise, there will be an excise tax equal to 35% of the amount you contributed to all employees' HSAs. Exception. The Tax Relief and Health Care Act of 2006 allows employers to make larger HSA contributions for a nonhighly compensated employee than for a highly com- pensated employee. A highly compensated employee for 2008 is an employee who meets either of the following tests. 1. The employee was a 5°i° owner at any time during the year or the preceding year. 2. The employee received more than $100,000 in pay for the preceding year. You can choose to ignore test (2) if the employee was not also in the 20°% of employees when ranked by pay for the preceding year. Partnerships and S corporations. Partners and 2% shareholders of an S corporation are not eligible for salary reduction (pre-tax) contributions to an HSA. Employer con- tributions to the NSA of a bona fide partner or 2% share- holderare treated as distributions or guaranteed payments as determined by the facts and circumstances. Cafeteria plans. You may contribute to an employee's HSA using a cafeteria plan and your contributions are not subject to the statutory comparability rules. However, cafe- teria plan nondiscrimination rules still apply. For example, contributions under a cafeteria plan to employee HSAs cannot be greater for higher-paid employees than they are for lower-paid employees. Contributions that favor lower-paid employees are not prohibited. Reporting requirements. You must report your contribu- tions to an employee's HSA on Form W-2 in box 12 using code "W." The trustee or custodian of the HSA, generally a bank or insurance company, reports distributions from the HSA using Form 1099-SA, Distributions from an HSA, Archer MSA, or Medicare Advantage MSA. Lodging on Your Business Premises You can exclude the value of lodging you furnish to an employee from the employee's wages if it meets the follow- ing tests. • It is furnished on your business premises. • It is furnished for your convenience. • The employee must accept it as a condition of em- ployment. Different tests may apply to lodging furnished by educa- tional institutions. See section 119(d) of the Interna# Reve- nue Cade for details. The exclusion does not apply if you allow your employee to choose to receive additional pay instead of lodging. On your business premises. For this exclusion, your business premises is generally your employee's place of work. (For special rules that apply to lodging furnished in a camp located in a foreign country, see section 119(c) of the Internal Revenue Code and its regulations.) For your convenience. Whether or not you furnish lodg- ing for your convenience as an employer depends on all the facts and circumstances. You furnish the lodging to your employee for your convenience if you do this for a substantial business reason other than to provide the em- ployee with additional pay. This is true even if a law or an employment contract provides that the lodging is furnished as pay. However, a written statement that the lodging is furnished for your convenience is not sufficient. Condition of employment. Lodging meets this test if you require your employees to accept the lodging because they need to live on your business premises to be able to properly perform their duties. Examples include employ- ees who must be available at all times and employees who could not perform their required duties without being fur- nished the lodging. It does not matter whether you must furnish the lodging as pay under the terms of an employment contract or a law fixing the terms of employment. Example. A hospital gives Joan, an employee of the hospital, the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance in addition to her regular salary. If Joan chooses to live at the hospital, the hospital cannot exclude the value of the lodging from her wages because she is not required to live at the hospital to properly perform the duties of her employment. S corporation shareholders. For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who directly or indirectly owns (at any time during the year} Publication 15-B (2008) Page 13 more than 2% of the corporation's stock or stock with more than 2°i° of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Meals This section discusses the exclusion rules that apply to de minimis meals and meals on your business premises. De Minimis Meals You can exclude any meal or meal money you provide to an employee if it has so little value (taking into account how frequently you provide meals to your employees) that ac- counting for it would be unreasonable or administratively impracticable. The exclusion applies, for example, to the following items. • Coffee, doughnuts, or soft drinks. • Occasional meals or meal money provided to enable an employee to work overtime. (However, the exclu- sion does not apply to meal money figured on the basis of hours worked.) • Occasional parties or picnics for employees and their guests. This exclusion also applies to meals you provide at an employer-operated eating facility for employees if the an- nual revenue from the facility equals or exceeds the direct costs of the facility. For this purpose, your revenue from providing a meal is considered equal to the facility's direct operating costs to provide that meal if its value can be excluded from an employee's wages as explained under Meals on Your Business Premises later. tf food or beverages you furnish to employees TIP qualify as a de minimis benefit, you can deduct their full cost. The 50% limit on deductions for the cost of meals does not apply. The deduction limit on meals is discussed in chapter 2 of Publication 535. Employee. For this exclusion, treat any recipient of a de minimis meal as an employee. Employer-operated eating facility for employees. An employer-operated eating facility for employees is an eat- ing facility that meets all the following conditions. • You own or lease the facility. • You operate the facility. (You are considered to op- erate the eating facility if you have a contract with another to operate it.) • The facility is an or near your business premises. • You provide meals {food, drinks, and related serv- ices) at the facility during, or immediately before or after, the employee's workday. Exclusion from wages. You can generally exclude the value of de minimis meals you provide to an empioyee from the employee's wages. Exception for highly compensated employees. You cannot exclude from the wages of a highly compensated employee the value of a meal provided at an em- ployer-operated eating facility that is not available on the same terms to one of the following groups. • All of your employees. • A group of employees defined under a reasonable classification you setup that does not favor highly compensated employees. For this exclusion, a highly compensated employee for 2008 is an employee who meets either of the following tests. 1. The employee was a 5°i° owner at any time during the year or the preceding year. 2. The employee received more than $100,000 in pay for the preceding year. You can choose to ignore test (2) if the employee was not also in the top 20°% of employees when ranked by pay for the preceding year. Meals on Your Business Premises You can exclude the value of meals you furnish to an employee from the employee's wages if they meet the following tests. • They are furnished on your business premises. • They are furnished for your convenience. This exclusion does not apply if you allow your employee to choose to receive additional pay instead of meals. On your business premises. Generally, for this exclu- sion, the employee's puce of work is your business prem- ises. For your convenience. Whether you furnish meals for your convenience as an employer depends on ail the facts and circumstances. You furnish the meals to your em- ployee for your convenience if you do this for a substantial business reason other than to provide the employee with additional pay. This is true even if a law or an employment contract provides that the meals are furnished as pay. However, a written statement that the meals are furnished for your convenience is not sufficient. Meals excluded for at/ employees if excluded for more than half. If more than half of your employees who are furnished meals on your business premises are fur- nished the meals for your convenience, you can treat all meais you furnish to employees on your business prem- ises as furnished for your convenience. Food service employees. Meals you furnish to a res- taurant or other food service employee during, or immedi- ately before or after, the employee's working hours are furnished for your convenience. For example, if a waitress works through the breakfast and lunch periods, you can exclude from her wages the value of the breakfast and lunch you furnish in your restaurant for each day she works. Page 14 Publication 15-B (2008) Example. You operate a restaurant business. You fur- nish your employee, Carol, who is a waitress working 7 a.m. to 4 p.m., two meals during each workday. You encourage but do not require Carol to have her breakfast on the business premises before starting work. She must have her lunch on the premises. Since Carol is a food service employee and works during the normal breakfast and lunch periods, you can exclude from her wages the value of her breakfast and lunch. If you also allow Carol to have meals on your business premises without charge on her days off, you cannot ex- clude the value of those meals from her wages. Employees available for emergency calls. Meals you furnish during working hours so an employee will be avail- able for emergency calls during the meal period are fur- nished for your convenience. You must be able to show these emergency calls have occurred or can reasonably be expected to occur. Example. A hospital maintains a cafeteria on its prem- ises where all of its 230 employees may get meals at no charge during their working hours. The hospital must have 120 of its employees available for emergencies. Each of these 120 employees is, at times, called upon to perform services during the meal period. Although the hospital does not require these employees to remain on the prem- ises, they rarely leave the hospital during their meal period. Since the hospital furnishes meals on its premises to its employees so that more than half of them are available for emergency calls during meal periods, the hospital can exclude the value of these meals from the wages of all of its employees. Short meal periods. Meals you furnish during working hours are furnished for your convenience if the nature of your business restricts an employee to a short meal period (such as 30 or 45 minutes) and the employee cannot be expected to eat elsewhere in such a short time. For exam- ple, meals can qualify for this treatment if your peak work-load occurs during the normal lunch hour. However, they do not qualify if the reason for the short meat period is to allow the employee to leave earlier in the day. Example. Frank is a bank teller who works from 9 a.m. to 5 p.m. The bank furnishes his lunch without charge in a cafeteria the bank maintains on its premises. The bank furnishes these meals to Frank to limit his lunch period to 30 minutes, since the bank's peak workload occurs during the normal lunch period. If Frank got his lunch elsewhere, it would take him much longer than 30 minutes and the bank strictly enforces the time limit. The bank can exclude the value of these meals from Frank's wages. Proper meats not otherwise available. Meals you fur- nish during working hours are furnished for your conve- nience if the employee could not otherwise eat proper meals within a reasonable period of time. For example, meals can qualify for this treatment if there are insufficient eating facilities near the place of employment. Meats after work hours. Meals you furnish to an em- ployee immediately after working hours are furnished for your convenience if you would have furnished them during working hours for a substantial nonpay business reason but, because of the work duties, they were not eaten during working hours. Meals you furnish to promote goodwill, boost mo- rale, or attract prospective employees. Meals you fur- nish to promote goodwill, boost morale, or attract prospective employees are not considered furnished for your convenience. However, you may be able to exdlude their value as discussed under De Minimis Meals, earlier. Meals furnished on nanworkdays or with lodging. You generally cannot exclude from an employee's wages the value of meals you furnish on a day when the employee is not working. However, you can exclude these meals if they are furnished with lodging that is excluded from the employee's wages as discussed under Lodging on Your Business Premises, earlier. Meals with a charge. The fact that you charge for the meals and that your employees may accept or decline the meals is not taken into account in determining whether or not meals are furnished for your convenience. S corporation shareholder-employee. For #his exclu- sion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who directly or indirectly owns (at any time dur- ing the year) more than 2°~0 of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Moving Expense Reimbursements This exclusion applies to any amount you directly or indi- rectlygive to an employee, (including services furnished in kind) as payment for, or reimbursement of, moving ex- penses. You must make the reimbursement under rules similar to those described in chapter 11 of Publication 535 for reimbursement of expenses for travel, meals, and en- tertainment under accountable plans. The exclusion applies only to reimbursement of moving expenses that the employee could deduct if he or she had paid or incurred them without reimbursement. However, it does not apply if the employee actually deducted the expenses in a previous year. Deductible moving expenses. Deductible moving ex- penses include only the reasonable expenses of: • Moving household goods and personal effects from the former home to the new home, and • Traveling (including lodging) from the former home to the new home. Deductible moving expenses do not include any ex- pensesfor meals and must meet both the distance test and the time test. The distance test is met if the new job location is at least 50 miles farther from the employee's old home than the old job location was. The time test is met if the employee vrorks at least 39 weeks during the first 12 months after arriving in the general area of the new job location. For mare information on deductible moving expenses, see Publication 521, Moving Expenses. Employee. For this exclusion, treat the following individu- als as employees. Publication 15-8 (2005) Page 15 • A current employee. • A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your pri- mary direction or control. Exception for S corporation shareholders. Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder is someone who directly or indirectly owns (at any time dur- ing the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder. Exclusion from wages. Generally, you can exclude qual- ifying moving expense reimbursement you provide to an employee from the employee's wages. If you paid the reimbursement directly to the employee, report the amount in box 12 of Form W-2 with the code "P." Do not report payments to a third party for the employee's moving ex- penses or the value of moving services you provided in kind. No-Additional-Cost Services This exclusion applies to a service you provide to an employee if it does not cause you to incur any substantial additional costs. The service must be offered to customers in the ordinary course of the line of business in which the employee performs substantial services. Generally, no-additional-cost services are excess ca- pacity services, such as airline, bus, or train tickets; hotel rooms; or telephone services provided free or at a reduced price to employees working in those lines of business. Substantial additional costs. To determine whether you incur substantial additional costs to provide a service to an employee, count any lost revenue as a cost. Do not reduce the costs you incur by any amount the employee pays for the service. You are considered to incur substantial addi- tional costs if you or your employees spend a substantial amount of time in providing the service, even if the time spent would otherwise be idle or if the services are pro- vided outside normal business hours. Reciprocal agreements. A no-additional-cost service provided to your employee by an unrelated employer may qualify as a no-additional-cost service if all the following tests are met: • The service is the same type of service generally provided to customers in both the line of business in which the employee works and the sine of business in which the service is provided. • You and the employer providing the service have a written reciprocal agreement under which a group of employees of each employer, ail of whom perform substantial services in the same line of business, may receive no-additional-cost services from the other employer. • Neither you nor the other employer incurs any sub- stantial additional cost either in providing the service or because of the written agreement. Employee. For this exclusion, treat the following individu- als as employees. 1. A current employee. 2. A former employee who retired or left on disability. 3. A widow or widower of an individual who died while an employee. 4. A widow or widower of a former employee who re- tired or left on disability. 5. A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direc- tion or control. 6. A partner who performs services for a partnership Treat services you provide to the spouse or dependent child of an employee as provided to the employee. For this fringe benefit, dependent child means any son, stepson, daughter, or stepdaughter who is a dependent of the em- ployee, or both of whose parents have died and who has not reached age 25. Treat a child of divorced parents as a dependent of both parents. Treat any use of air transportation by the parent of an employee as use by the employee. This rule does not apply to use by the parent of a person considered an employee because of item (3) or (4) above. Exclusion from wages. You can generally exclude the value of a no-additional-cost service you provide to an employee from the employee's wages. Exception for highly compensated employees. You cannot exclude from the wages of a highly compensated empioyee the value of a no-additional-cost service that is not available on the same terms to one of the following groups. • All of your employees. • A group of employees defined under a reasonable classification you set up that does not favor highly compensated employees. For this exclusion, a highly compensated employee for 2008 is an employee who meets either of the following tests. 1. The employee was a 5% owner at any time during the year or the preceding year. 2. The employee received more than $100,000 in pay for the preceding year. You can choose to ignore test {2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Retirement Planning Services You may exclude from an employee's wages the value of any retirement planning advice or information you provide to your employee or his or her spouse if you maintain a qualified retirement plan as defined in section 219(8)(5) of the Internal Revenue Code. In addition to employer plan advice and information, the services provided may include general advice and information on retirement. However, Page 16 Publication 15-B (20f)8) the exclusion does not apply to services for tax prepara- tion, accounting, legal, or brokerage services. Transportation (Commuting) Benefits This section discusses exclusion rules that apply to bene- fits you provide to your employees for their personal trans- portation, such as commuting to and from work. These rules apply to the following transportation benefits. • De minimis transportation benefits. • Qualified transportation benefits. Special rules that apply to demonstrator cars and qualified nonpersonal-use vehicles are discussed under Working Condition Benefits, later. De Minimis Transportation Benefits You can exclude the value of any de minimis transportation benefit you provide to an employee from the employee's wages. A de minimis transportation benefit is any transpor- tation benefit you provide to an employee if it has so little value (taking into account how frequently you provide transportation to your employees) that accounting for it would be unreasonable or administratively impracticable. For example, it applies to occasional transportation fare you give an employee because the employee is working overtime if the benefit is reasonable and is not based on hours worked. Employee. For this exclusion, treat any recipient of a de minimis transportation benefit as an employee, Qualified Transportation Benefits This exclusion applies to the following benefits. • A ride in a commuter highway vehicle between the employee's home and work place. • A transit pass. • Qualified parking. The exclusion applies whether you provide only one or a combination of these benefits to your employees. Qualified transportation benefits can be provided directly by you or through a bona fide reimbursement arrange- ment. However, cash reimbursements for transit passes qualify only if a voucher or a similar item that the employee can exchange only far a transit pass is not readily available for direct distribution by you to your employee. A voucher is readily available for direct distribution only if an employee can obtain it from a voucher provider that does not impose fare media charges or other restrictions that effectively prevent the employer from obtaining vouchers. See Regu- lations section 1.132-9 for more information. You can exclude qualified transportation fringe benefits from an employee's wages even if you provide them in place of pay. Far information about providing qualified transportation fringe benefits under a compensation reduc- tion agreement, see Regulations section 1.132-9(b)(Q-11). Commuter highway vehicle. A commuter highway vehi- cle is any highway vehicle that seats at least 6 adults (not including the driver). In addition, you must reasonably expect that at least 80% of the vehicle mileage will be for transporting employees between their homes and work place with employees occupying at least one-half the vehi- cle's seats (not including the driver's). Transit pass. A transit pass is any pass, token, farecard, voucher, or similar item entitling a person to ride, free of charge or at a reduced rate, one of the following. • On mass transit. • In a vehicle that seats at least 6 adults (not including the driver) if a person in the business of transporting persons for pay or hire operates it. Mass transit may be publicly or privately operated and includes bus, rail, or ferry. For guidance on the use of smart cards and debit cards to provide qualified transporta- tion fringes, see Rev. Rul. 2006-57, which is on page 911 of internal Revenue Bulletin 2006-47 at www.irs.gov/pub/ irs-irbs/irb06-47.pdf, and Notice 2007-76, which is on page 735 of Internal Revenue Bulletin 2007-40 at www.irs.gov/ pub/irs-irbs/irb07-40. pdf. Qualified parking. Qualified parking is parking you pro- vide toyour employees on or near your business premises. It includes parking on or near the location from which your employees commute to work using mass transit, com- muter highway vehicles, or carpools. It does not include parking at or near your employee's home. Employee. For this exclusion, treat the following individu- als as employees. • A current employee. • A leased employee who has provided services to you on a substantially full-time basis far at least a year if the services are performed under your pri- mary direction or control. A self-employed individual is not an employee for quali- fied transportation benefits. Exception for S corporation shareholders. Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder is someone who directly or indirectly owns (at any time dur- ing the year) more than 2% of the corporation's stock or stock with more than 2°io of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2°rn shareholder. Relation to other fringe benefits. You cannot exclude a qualified transportation benefit you provide to an employee under the de minimis or working condition benefit rules. However, if you provide a local transportation benefit other than by transit pass or commuter highway vehicle, or to a perscn other than an employee, you may be able to ex- clude all or part of the benefit under other fringe benefit rules {de minimis, working condition, etc.). Exclusion from wages. You can generally exclude the value of transportation benefits that you provide to an employee during 2008 from the employee's wages up to the following limits. Publication 15-B (2008) Page 17 • $115 per month for combined commuter highway vehicle transportation and transit passes. • X220 per month for qualified parking. Benefits more than the limit. If the value of a benefit for any month is more than its limit, include in the em- ployee's wages the amount over the limit minus any amount the emplayee paid for the benefit. You cannot exclude the excess from the employee's wages as a de minimis transportation benefit. More information. For more information on qualified transportation benefits, including van pools, and how to determine the value of parking, see Regulations section 1.132-9. Tuition Reduction An educational organization can exclude the value of a qualified tuition reduction it provides to an employee from the employee's wages. A tuition reduction for undergraduate education gener- ally qualifies for this exclusion if it is for the education of one of the following individuals. 1. A current employee. 2. A former employee who retired or left on disability. 3. A widow or widower of an individual who died while an employee. 4. A widow or widower of a former employee who re- tired or left on disability. 5. A dependent child or spouse of any individual listed in (1) through (4) above. A tuition reduction for graduate education qualifies for this exclusion only if it is for the education of a graduate student who performs teaching or research activities for the educational organization. For more information on this exclusion, see Publication 970, Tax Benefits for Education. Working Condition Benefits This exclusion applies to property and services you pro- vide to an employee so that the employee can perform his or her job. It applies to the extent the employee could deduct the cost of the property or services as a business expense or depreciation expense if he or she had paid for it. The employee must meet any substantiation require- ments that apply to the deduction. Examples of working condition benefits include an employee's use of a company car for business and job-related education provided to an employee. This exclusion also applies to a cash payment you provide for an employee's expenses for a specific or prear- ranged business activity for which a deduction is othe!vtirise allowable to the employee. You must require the employee to verify that the payment is actually used for those ex- penses and to return any unused part of the payment. Far information on deductible emp-oyee business ex- penses, see Unreimbursed Employee Expenses in Publi- cation 529. Miscellaneous Deductions. The exclusion does not apply to the following items. • A service or property provided under a flexible spending account in which you agree to provide the employee, over a time period, a certain level of un- specified noncash benefits with a predetermined cash value. • A physical examination program you provide, even if mandatory. • Any item to the extent the employee could deduct its cost as an expense for a trade or business other than your trade or business. Employee. For this exclusion, treat the following individu- als as employees. • A current employee. • A partner who performs services for a partnership. • A director of your company. • An independent contractor who performs services for you. Vehicle allocation rules. If you provide a car for an em- ployee's use, the amount you can exclude as a working condition benefit is the amount that would be allowable as a deductible business expense if the employee paid for its use. If the employee uses the car for both business and personal use, the value of the working condition benefit is the part determined to be for business use of the vehicle. See Business use of your car under Personal versus Business Expenses in chapter 1 of Publication 535. Also, see the special rules for certain demonstrator cars and qualified nonpersonal-use vehicles discussed below. However, instead of excluding the value of the working condition benefit, you can include the entire annual lease value of the car in the employee's wages. The employee can then claim any deductible business expense for the car as an itemized deduction on his or her personal income tax return. This option is available only if you use the lease value rule (discussed in section 3) to value the benefit. Demonstrator cars. Generally, all of the use of a demon- stratorcar by your full-time auto salesperson qualifies as a working condition benefit if the use is primarily to facilitate the services the salesperson provides for you and there are substantial restrictions on personal use. For more information and the definition of "full-time auto salesper- son," see Regulations section 1.132-5(0). For optional, simplified methods used to determine if full, partial, or no exclusion of income to the employee for personal use of a demonstrator car applies, see Revenue Procedure 2001-56. You can find Revenue Procedure 2001-56 on page 590 of Internal Revenue Bulletin 2001-51 at www.irs. gov/pub/irs-irbs/irb01-5 i.pdf. G}ualified nonpersonal-use vehicles. All of an em- ployee's use of a qualified nonpersonal-use vehicle is a working condition benefit. A qualified nonpersonal-use ve- hicle is any vehicle the employee is not likely to use more than minimally for personal purposes because of its de- sign. Qualified nonpersonal-use vehicles generally include all of the following vehicles. • Clearly marked police and fire vehicles. Page 18 Publication 15-B (2008) • Unmarked vehicles used by law enforcement officers paid the expenses. The education must meet at least one if the use is officially authorized. of the following tests. • An ambulance or hearse used for its specific pur- pose. • Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds. • Delivery trucks with seating for the driver only, or the driver plus a folding jump seat. • A passenger bus with a capacity of at least 20 pas- sengers used for its specific purpose. • School buses. • Tractors and other special-purpose farm vehicles. • The education is required by the employer or by law for the employee to keep his or her present salary, status, or job. The required education must serve a bona fide business purpose of the employer. • The education maintains or improves skills needed in the job. However, even if the education meets one or both of the above tests, it is not qualifying education if it: Is needed to meet the minimum educational require- ments of the employee's present trade or business, or Pickup trucks. A pickup truck with a loaded gross vehi- cle weight of 14,000 pounds or less is a qualified nonper- sonal-use vehicle if it has been specially modified so it is not likely to be used more than minimally for personal purposes. For example, a pickup truck qualifies if it is clearly marked with permanently affixed decals, special painting, or other advertising associated with your trade, business, or function and meets either of the following requirements. 1. It is equipped with at least one of the fallowing items a. A hydraulic lift gate. b. Permanent tanks or drums. c. Permanent side boards or panels that materially raise the level of the sides of the truck bed. d. Other heavy equipment (such as an electric gen- erator, welder, boom, or crane used to tow auto- mobiles and other vehicles). 2. It is used primarily to transport a particular type of load (other than over the public highways) in a con- struction, manufacturing, processing, farming, min- ing, drilling, timbering, or other similar operation for which it was specially designed or significantly modi- fied. Vans. A van with a loaded gross vehicle weight of 14,000 pounds or less is a qualified nonpersonal-use vehi- cle if it has been specially modified so it is not likely to be used more than minimally for personal purposes. For ex- ample, avan qualifies if it is clearly marked with perma- nently affixed decals, special painting, or other advertising associated with your trade, business, or function and has a seat for the driver only (or the driver and one other person) and either of the following items. • Permanent shelving that fills most of the cargo area. • An open cargo area and the van always carries merchandise, material, or equipment used in your trade, business, or function. Education. Certain job-related education you provide to an employee may qualify for exclusion as a working condi- tion benefit. To qualify, the education must meet the same requirements that would apply for determining whether the employee could deduct the expenses had the employee • Is part of a program of study that will qualify the employee for a new trade or business. Outplacement services. An employee's use of outplace- ment services qualifies as a working condition benefit if you provide the services to the employee on the basis of need and you get a substantial business benefit from the services distinct from the benefit you would get from the payment of additional wages. Substantial business bene- fits include promoting a positive business image, maintain- ing employee morale, and avoiding wrongful termination suits. Outplacement services do not qualify as a working con- dition benefit if the employee can choose to receive cash or taxable benefits in place of the services. If you maintain a severance plan and permit employees to get outplace- ment services with reduced severance pay, include in the employee's wages the difference between the unreduced severance and the reduced severance payments. Exclusion from wages. You can generally exclude the value of a working condition benefit you provide to an employee from the employee's wages. Exception for independent contractors. You cannot exclude the value of parking (unless de minimis), transit passes (if their monthly value exceeds $115 per month), or the use of consumer goods you provide in a product testing program from the compensation you pay to an indepen- dent contractor who performs services for you. Exception for company directors. You cannot ex- clude the value of the use of consumer goods you provide in a product testing program from the compensation you pay to a director. 3. Fringe Benefit Valuation Rules This section discusses the rules you must use to determine the value of a fringe benefit you provide to an employee. You must determine the value of any benefit you cannot exclude under the ruses in section 2 or for which the amount you can exclude is limited. See Including taxable benefits in pay, on page 2. In most cases, you must use the general valuation rule to value a fringe benefit. However, you may be able to use Publication 15-B (2008) Page 19 a special valuation rule to determine the value of certain benefits. This section does not discuss the special valuation rule used to value meals provided at an employer-operated eating facility for employees. For that rule, see Regulations section 1.61-21(j). This section also does not discuss the special valuation rules used to value the use of aircraft. For those rules, see Regulations sections 1.61-21(g) and (h). General Valuation Rule You must use the general valuation rule to determine the value of most fringe benefits. Under this rule, the value of a fringe benefit is its fair market value. Fair market value. The fair market value (FMV) of a fringe benefit is the amount an employee would have to pay a third party in an arm's-length transaction to buy or lease the benefit. Determine this amount on the basis of all the facts and circumstances. Neither the amount the employee considers to be the value of the fringe benefit nor the cost you incur to provide the benefit determines its FMV. Employer-provided vehicles. In general, the FMV of an employer-provided vehicle is the amount the employee would have to pay a third party to lease the same or similar vehicle on the same or comparable terms in the geo- graphic area where the employee uses the vehicle. A comparable lease term would be the amount of time the vehicle is available for the employee's use, such as a 1-year period. Do not determine the FMV by multiplying a cents-per-mile rate times the number of miles driven un- less the employee can prove the vehicle could have been leased on acents-per-mile basis. Cents-Per-Mile Rule Under this rule, you determine the value of a vehicle you provide to an employee for personal use by multiplying the standard mileage rate by the total miles the employee drives the vehicle for personal purposes. Personal use is any use of the vehicle other than use in your trade or business. This amount must be included in the employee's wages or reimbursed by the employee. For 2008, the standard mileage rate is 50.5 cents per mile. You can use the cents-per-mile rule if either of the following requirements is met. • Yau reasonably expect the vehicle to be regularly used in your trade or business throughout the calen- dar year {or for a shorter period during which you own or lease it). • The vehicle meets the mileage test. Maximum autamo6iie value. You cannot use the cents-per-mile rule for an automobile (any four-wheeled vehicle; such as a car, pickup truck. or van) if its value when you first make it available to any employee for personal use is more Than an amount deter- mined bythe lRS asthe maximum automobile value for the year, For example, you cannot use the cents-per-mile rule for an automobile that you first made available fo an em- ployee in 2007 if its value at that time exceeded $15,100 for a passenger automobile or $i&,100 for a truck or van. The maximum automobile value for 2008 will be published in a revenue procedure in the Internal Revenue Bulletin early in 2008. If you and the employee own or lease the automobile together, see Regulations section 1.61-21(e)(1)(iii)(8). Vehicle. For the cents-per-mile rule, a vehicle is any mo- torized wheeled vehicle, including an automobile, manu- factured primarily for use on public streets, roads, and highways. Regular use in your trade or business. A vehicle is regularly used in your trade or business if at least one of the following conditions is met. • At least 50% of the vehicle's total annual mileage is for your trade or business. • You sponsor a commuting pool that generally uses the vehicle each workday to drive at least three em- ployees to and from work. • The vehicle is regularly used in your trade or busi- ness on the basis of all of the facts and circum- stances. Infrequent business use of the vehicle, such as for occasional trips to the airport or between your multiple business premises, is not regular use of the vehicle in your trade or business. Mileage test. A vehicle meets the mileage test fora calen- dar year if both of the following requirements are met. • The vehicle is actually driven at (east 10,000 miles during the year. If you own or lease the vehicle only part of the year, reduce the 10,000 mile requirement proportionately. • The vehicle is used during the year primarily by employees. Consider the vehicle used primarily by employees if they use it consistently for commuting. Do not treat the use of the vehicle by another individ- ual whose use would be taxed to the employee as use by the employee. For example, if only one employee uses a vehicle during the calendar year and that employee drives the vehicle at least 10;000 miles in that year, the vehicle meets the mileage test even if all miles driven by the employee are personal. Consistency requirements. If you use the cents-per-mile rule, the following requirements apply. • You must begin using the cents-per-mile rule on the first day you make the vehicle available to any em- ployee for personal use. However, if you use the commuting rule {discussed later) when you first make the vehicle available to any employee for per- sonal use, you can change to the cents-per-mile rule on the first day for which you da not use the commuting rule. • You must use the cents-per-mile rule for alt later years in which you make the vehicle available to any employee and the vehicle qualifies, except that you can use the commuting rule for any year during Page 20 Publication 15-8 (2008) which apse of the vehicle qualifies under the commut- ing rules. However, if the vehicle does nat qualify for the cents-per-mile rule during a later year, you can use for that year and thereafter any other rule for which the vehicle then qualifies. • You must continue to use the cents-per-mile rule if you provide a replacement vehicle to the employee (and the vehicle qualifies for the use of this rule} and your primary reason for the replacement is to reduce federa!I taxes. Items included in cents-per-mile rate. The cents-per-mile rate includes the value of maintenance and insurance for the vehicle. Do not reduce the rate by the value of any service included in the rate that you did not provide. You can take into account the services actually provided for the vehicle by using the General Valuation Rule, earlier. For miles driven in the United States, its territories and possessions, Canada, and Mexico, the cents-per-mile rate includes the value of fuel you provide. if you do not provide fuel, you can reduce the rate by no more than 5.5 cents. For special rules that apply to fuel you provide for miles driven outside the United States, Canada, and Mexico, see Regulations section 1.61-21(e)(3)(ii)(B). The value of any other service you provide for a vehicle is not included in the cents-per-mile rate. Use the general valuation rule to value these services. Commuting Rule Under this rule, you determine the value of a vehicle you provide to an employee for commuting use by multiplying each one-way commute (that is, from home to work or from work to home} by $1.50. If more than one employee com- mutes in the vehicle, this value applies to each employee. This amount must be included in the employee's wages or reimbursed by the employee. You can use the commuting rule if all the following requirements are met. You provide the vehicle to an employee for use in your trade or business and, for bona fide noncom- pensatory business reasons, you require the em- ployee to commute in the vehicle. You will be treated as if you had met this requirement if the vehicle is generally used each workday to carry at least three employees to and from work in an employer sponsored commuting pool. You establish a written policy under which you do not allow the employee to use the vehicle for per- sonal purposes other than for commuting or de minimis personal use (such as a stop for a personal errand on the way between a business delivery and the emplcyee's home}. Persona! use of a vehicle is all use that is not for your trade or business. • The employee does not use the vehicle for personal purposes other than commuting and de minimis personal use. • If this vehicle is an automobile (any four-wheeled vehicle; such as a car, pickup truck, or van}, the employee who uses it for commuting is not a contras employee. See Control employee below. Vehicle. For this rule, a vehicle is any motorized wheeled vehicle, including an automobile manufactured primarily for use on public streets, roads, and highways. Control employee. A control employee of a nongovern- ment employer for 2008 is generally any of the following employees. • Aboard or shareholder-appointed, confirmed, or elected officer whose pay is $90,000 or more. • A director. • An employee whose pay is $185,000 or more. • An employee who owns a 1 % or more equity, capi- tal, or profits interest in your business. A control employee for a government employer for 2008 is either of the following. • A government employee whose compensation is equal to or exceeds Federal Government Executive Level V. (See the Office of Personnel Management website at www.opm.gov/oca/payrates/index.asp for 2008 compensation information.} • An elected official. Highly compensated employee alternative. Instead of using the preceding definition, you can choose to define a control employee as any highly compensated employee. A highly compensated employee for 2008 is an employee who meets either of the following tests. 1. The employee was a 5% owner at any time during the year or the preceding year. 2. The employee received more than $100,000 in pay for the preceding year. You can choose to ignore test (2) if the employee was not also in the top 20% of employees when ranked by pay for the preceding year. Lease Value Rule Under this rule, you determine the value of an automobile you provide to an employee by using its annual lease value. For an automobile provided only part of the year, use either its prorated annual lease value or its daily lease value. If the automobile is used by the employee in your busi- ness, you generally reduce the lease value by the amount that is excluded from the employee's wages as a working condition benefit. However, you can choose to include the entire lease value in the employee's wages. See Vehicle allocation rules on page 18. Automobile. For this rule, an automobile is any four-wheeled vehicle (such as a car, pickup truck, or van} manufactured primarily for use on public streets, roads, and highways. Consistency requirements. If you use the lease value rule, the following requirements apply. Publication 15-13 (2008) Page 21 1. You must begin using this rule on the first day you make the automobile available to any employee for personal use. However, the following exceptions ap- ply. a. If you use the commuting rule (discussed earlier) when you first make the automobile available to any employee for personal use, you can change to the lease value rule on the first day for which you do not use the commuting rule. b. If you use the cents-per-mile rule (discussed ear- lier) when you first make the automobile available to any employee for personal use, you can change to the lease value rule on the first day on which the automobile no longer qualifies for the cents-per-mile rule. (1} Automobile FMV (2) Annual Lease 23,000 to 23,999 ............... ..... 6,350 24,000 to 24,999 ............... ..... 6,600 25,000 to 25,999 ............... ..... 6,850 26,000 to 27,999 ............... ..... 7,250 28,000 to 29,999 ............... ..... 7,750 30,000 to 31,999 ............... ..... 8,250 32,000 to 33,999 ............... ..... 8,750 34,000 to 35,999 ............... ..... 9,250 36,000 to 37,999 ............... ..... 9,750 38,000 to 39,999 ............... ..... 10,250 40,000 to 41,999 ............... ..... 10,750 42,000 io 43,999 ............... ..... 11,250 44,000 to 45,999 ............... ..... 11,750 46,000 to 47,999 ........... . ... ..... 12,250 48,000 to 49,999 ............... ..... 12,750 50,000 to 51,999 ............... ..... 13,250 52,000 to 53,999 ............... ..... 13,750 54,000 to 55,999 ............... ..... 14,250 56,000 to 57,999 ............... ..... 14,750 58,000 to 59;999 ............... .... . 15,250 2. You must use this rule for all later years in which you For automobiles with a FMV of more than $59,999, the make the automobile available to any employee, ex- annual lease value equals (.25 x the FMV of the automo- cept that you can use the commuting rule for any bile) + $500. year during which use of the automobile qualifies. 3. You must continue to use this rule if you provide a replacement automobile to the employee and your primary reason for the replacement is to reduce fed- eral taxes. Annual Lease Value Generaliy, you figure the annual lease value of an automo- bile as follows. 1. Determine the fair market value (FMV) of the auto- mobile on the first date it is available to any em- ployee for personal use. 2. Using Table 3-1. Annual Lease Value Table, read down column (1) until you come to the dollar range within which the FMV of the automobile falls. Then read across to column (2) to find the annual lease value. Table 3-1. Annual Lease Value Table (1) Automobile FMV $ 0 to 999 ........................ . 1,000 to 1,999 .................... . 2.000 to 2,999 .................... . 3,000 to 3,999 .................... . 4,000 to 4,999 .............. . ..... . 5,000 to 5,999 .................... . 6,000 to 6,999 .................... . 7,000 to 7,999 .................... . 8,000 to 8,999 ..................... . 9.000 to 9,999 .................... . 10,000 to 10,999 ................... . 11,000 to 11,999 ................... . 12,000 to 12,999 ................... . 13,000 to 13,999 ................... . 14,000 to 14,999 ................... . 15,000 to 15,999 ................... . 16,000 to 16,999 ................... . 17,000 to 17,999 ................... . 18,000 to 18,999 ................... . 19,000 to 19,999 ................... . 20,000 to 20,999.... ............ . 21,000 to 21,999 ................... . 22,000 to 22,999 ................... . (2) Annual Lease 600 850 1.100 1.350 1,600 1,850 2,100 2,350 2,600 2,850 3,100 3,350 3,600 3.850 4.100 4,350 4,600 4,850 5,100 5,350 5.600 5,850 6,100 FMV. The FMV of an automobile is the amount a person would pay to buy it from a third party in an arm's-length transaction in the area in which the automobile is bought or leased. That amount includes all purchase expenses, such as sales tax and title fees. If you have 20 or more automobiles, see Regulations section 1.61-21(d)(5)(v). If you and the employee own or lease the automobile together, see Regulations section 1.61-21(d)(2)(ii). You da not have to include the value of a telephone or any specialized equipment added to, or carried in, the automobile if the equipment is necessary for your busi- ness. However, include the value of specialized equipment if the employee to whom the automobile is available uses the specialized equipment in a trade or business other than yours. Neither the amount the employee considers to be the value of the benefit nor your cost for either buying or leasing the automobile determines its FMV. However, see Safe-harbor value, next. Safe-harbor value. You may be able to use a safe-harbor value as the FMV. Far an automobile you bought at arm's length, the safe-harbor value is your cost, including sales tax, title, and other purchase expenses. You cannot have been the man- ufacturer of the automobile. For an automobile you lease, you can use any of the following as the safe-harbor value. • The manufacturer's invoice price (including options) plus 4%. • The manufacturer's suggested retail price minus 8% (including saes tax, title, and other expenses of purchase). • The retail value of the automobile reported by a nationally recognized pricing source if that retail value is reasonable for the automobile. Items included in annual lease value table. Each an- nual lease value in the table includes the value of mainte- nance and insurance far the automobile. Do not reduce the annual lease value by the value of any of these services Page 22 Publication 15-8 (2008) that you did not provide. For example, do not reduce the annual lease value by the value of a maintenance service contract or insurance you did not provide. (You can take into account the services actually provided for the automo- bile by using the general valuation rule discussed earlier.) Ifems not included. The annual lease value does not include the value of fuel you provide to an employee for persona! use, regardless of whether you provide it, reim- burse its cost, or have it charged to you. You must include the value of the fuel separately in the emplayee's wages. You can value fuel you provided at FMV or at 5.5 cents per mile for all miles driven by the employee. However, you cannot value at 5.5 cents per mile fuel you provide for miles driven outside the United States (including its possessions and territories}, Canada, and Mexico. If you reimburse an employee for the cost of fuel, or have it charged to you, you generally value the fuel at the amount you reimburse, or the amount charged to you if it was bought at arm's length. If you have 20 or more automobiles, see Regulations section 1.61-21(d)(3)(ii)(D). If you provide any service other than maintenance and insurance for an automobile, you must add the FMV of that service to the annual lease value of the automobile to figure the value of the benefit. 4-year lease term. The annual lease values in the table are based on a 4-year lease term. These values will gener- ally stay the same for the period that begins with the first date you use this rule for the automobile and ends on December 31 of the fourth full calendar year following that date. Figure the annual lease value for each later 4-year period by determining the FMV of the automobile on Janu- ary 1 of the first year of the later 4-year period and select- ingthe amount in column (2) of the table that corresponds to the appropriate dollar range in column (1 ). Using fhe special accounting rule. If you use the special accounting rule for fringe benefits discussed in section 4, you can f'sgure the annual lease value for each later 4-year period at the beginning of the special account- ing period that starts immediately before the January 1 date described in the previous paragraph. For example, assume that you use the special account- ing rule and that, beginning on November 1, 2007, the special accounting period is November 1 to October 31. You elected to use the lease value rule as of January 1, 2008. You can refigure the annual lease value on Novem- ber 1, 2011, rather than on January 1, 2012. Transferring an automobile from one employee to an- other. Unless the primary purpose of the transfer is to reduce federal taxes, you can refigure the annual lease value based on the FMV of the automobile on January 1 of the calendar year of transfer. However, if you use the special accounting rule for fringe benefits discussed in section 4, you can refigure the annual (ease value (based on the FMV of the automobile) at the beginning of the special accounting period in which the transfer occurs. Prorated Annual Lease Value If you provide an automobile to an employee fora continu- ous period of 30 or more days but less than an entire calendar year, you can prorate the annual lease value. Figure the prorated annual lease value by multiplying the annual lease value by a fraction, using the number of days of availability as the numerator and 365 as the denomina- tor. If you provide an automobile continuously for at least 30 days, but the period covers 2 calendar years (or 2 special accounting periods if you are using the special accounting rule for fringe benefits discussed in section 4), you can use the prorated annual lease value or the daily lease value. If you have 20 or more automobiles, see Regulations section 1.61-21(d)(6). If an automobile is unavailable to the employee because of his or her personal reasons (for example, if the em- ployee is on vacation), you cannot take into account the periods of unavailability when you use a prorated annual lease value. You cannot use a prorated annual tease value if the reduction of federal taxis the main reason the automobile is unavailable. Daily Lease Value If you provide an automobile to an employee fora continu- ous period of less than 30 days, use the daily lease value to figure its value. Figure the daily lease value by multiply- ing the annual lease value by a fraction, using four times the number of days of availability as the numerator and 365 as the denominator. However, you can apply a prorated annual lease value for a period of continuous availability of less than 30 days by treating the automobile as if it had been available for 30 days. Use a prorated annual lease value if it would result in a lower valuation than applying the daily lease value to the shorter period of availability. Unsafe Conditions Commuting Rule Under this rule, the value of commuting transportation you provide to a qualified employee solely because of unsafe conditions is $1.50 for aone-way commute (that is, from home to work or from work to home). This amount must be included in the employee's wages or reimbursed by the employee. You can use the unsafe conditions commuting rule for qualified employees if all of the following requirements are met. • The employee would ordinarily walk or use public transportation for commuting. • You have a written policy under avhich you do not provide the transportation for personal purposes other than commuting because of unsafe conditions. • The employee does not use the transportation for persona! purposes other than commuting because of unsafe conditions. These requirements must be met on a trip-by-trip basis. Publication 15-B (2008) Page 23 Commuting transportation. This is transportation to or from work using any motorized wheeled vehicle (including an automobile) manufactured for use on public streets, roads, and highways. You or the employee must buy the transportation from a parry that is not related to you. If the employee buys it, you must reimburse the employee for its cost (for example, cab fare) under a bona fide reimburse- mentarrangement. Qualified employee. A qualified employee for 2008 is one who: • Performs services during the year, • Is paid on an hourly basis, • Is not claimed under section 213(a)(1) of the Fair Labor Standards Act of 1938 (as amended) to be exempt from the minimum wage and maximum hour provisions, • Is within a classification for which you actually pay, or have specified in writing that you will pay, over- time pay of at least one and one-half times the regu- lar rate provided in section 207 of the 1938 Act, and • Receives pay of not more than $100,000 during 2007. However, an employee is not considered a qualified em- ployee if you do not comply with the recordkeeping require- ments concerning the employee's wages, hours, and other conditions and practices of employment under section 21 i (c) of the 1938 Act and the related regulations. Unsafe conditions. Unsafe conditions exist if, under the facts and circumstances, a reasonable person would con- sider it unsafe for the employee to walk or use public transportation at the time of day the employee must com- mute. One factor indicating whether it is unsafe is the history of crime in the geographic area surrounding the employee's workplace or home at the time of day the employee commutes. 4. Rules for Withholding, Depositing, and Reporting Use the following guidelines for withholding, depositing, and reporting taxable noncash fringe benefits. For addi- tional information on how to withhold on fringe benefits, see Publication 15 (Circular E), section 5. Valuation of fringe benefits. Generally, you must deter- mine the value of noncash fringe benefits no later than January 31 of the next year. Before January 31, you may reasonably estimate the value of the fringe benefits for purposes of withholding and depositing on time. Choice of period far withholding, depositing, and re- porting. For employment tax and withholding purposes, you can treat fringe benefits (including personal use of employer-provided highway motor vehicles} as paid on a pay period; quarter, semiannual, annual, or other basis. But the benefits must be treated as paid no less frequently than annually. You do not have to choose the same period for all employees. You can withhold more frequently for some employees than for others. You can change the period as often as you like as long as you treat all of the benefits provided in a calendar year as paid no later than December 31 of the calendar year. You can also treat the value of a single fringe benefit as paid on one or more dates in the same calendar year, even if the employee receives the entire benefit at one time. For example, if your employee receives a fringe benefit valued at $1,000 in one pay period during 2008, you can treat it as made in four payments of $250, each in a different pay period of 2008. You do not have to notify the IRS of the use of the periods discussed above. Transfer of property. The above choice for reporting and withholding does not apply to a fringe benefit that is a transfer of tangible or intangible personal property of a kind normally held for investment or a transfer of real property. For this kind of fringe benefit, you must use the actual date the property was transferred to the employee. Withholding and depositing taxes. You can add the value of fringe benefits to regular wages for a payroll period and figure income tax withholding on the total. Or you can withhold federal income tax on the value of fringe benefits at the flat 25% rate that applies to supplemental wages. See section 7 in Publication 15 (Circular E) for the flat rate (35%) when supplemental wage payments to an individual exceed $1,000,000 during the year. You must withhold the applicable income, social secur- ity, and Medicare taxes on the date or dates you chose to treat the benefits as paid. Deposit the amounts withheld as discussed in section 11 of Publication 15 (Circular E). Amount of deposit. To estimate the amount of income tax withholding and employment taxes and to deposit them on time, make a reasonable estimate of the value of the fringe benefits provided on the date or dates you chose to treat the benefits as paid. Determine the estimated deposit by figuring the amount you would have had to deposit if you had paid cash wages equal to the estimated value of the fringe benefits and withheld taxes from those cash wages. Even if you do not know which employee will receive the fringe benefit on the date the deposit is due, you should follow this procedure. If you underestimate the value of the fringe benefits and deposit less than the amount you would have had to deposit if the applicable taxes had been withheld, you may be subject to a penalty. If you overestimate the value of the fringe benefit and overdeposit, you can either claim a refund or have the overpayment applied to your next Form 941. If you paid the required amount of taxes but wi#hheld a lesser amount from the employee, you can recover from the employee the social security, Medicare, or income taxes you deposited on the employee's behalf and in- cluded on the employee's Form W-2. However, you must recover the income taxes before April 1 of the following year. Paying your employee's share of social security and Medicare taxes. if you choose to pay your employee's social security and Medicare taxes on taxable fringe bene- fits without deducting them from his or her pay, you must include the amount of the payments in the employee's income. Also, if your employee leaves your employment and you have unpaid and uncollected taxes for noncash benefits, you are still liable for those taxes. You must add the uncollected employee share of social security and Page 24 Publication 15-B (2008) Medicare tax to the employee's wages. Follow the proce- dure discussed under Employee's Portion of Taxes Paid By Employer in section 7 of Publication 15-A. Do not use withheld federal income tax to pay the social security and Medicare tax. Special accounting rule. You can treat the value of ben- efits provided during the last 2 months of the calendar year, or any shorter period within the last 2 months, as paid in the next year. Thus, the value of benefits actually pro- vided in the last 2 months of 2007 could be treated as provided in 2008 together with the value of benefits pro- vided in the first 10 months of 2008. This does not mean that all benefits treated as paid during the last 2 months of a calendar year can be deferred until the next year. Only the value of benefits actually provided during the last 2 months of the calendar year can be treated as paid in the next calendar year. Limitation. The special accounting rule cannot be used, however, for a fringe benefit that is a transfer of tangible or intangible personal property of a kind normally held for investment or a transfer of real property. Conformity rules. Use of the special accounting rule is optional. You can use the rule for some fringe benefits but not others. The period of use need not be the same for each fringe benefit. However, if you use the rule for a particular fringe benefit, you must use it for all employees who receive that benefit. If you use the special accounting rule, your employee also must use it for the same period you use it. But your employee cannot use the special accounting rule unless you do. You do not have to notify the IRS if you use the special accounting rule. You may also, for appropriate reasons, change the period for which you use the rule without notifying the IRS. But you must report the income and deposit the withheld taxes as required for the changed period. Special rules for highway motor vehicles. If an em- ployee uses the employer's vehicle for personal purposes, the value of that use must be determined by the employer and included in the employee's wages. The value of the personal use must be based on fair market value or deter- mined by using one of the following three special valuation rules previously discussed in section 3. • The automobile lease valuation rule. See page 21. • The vehicle cents-per-mile rule. See page 20. • The commuting valuation rule (for commuting use only}. See page 21, Election not to withhold income tax. You can choose not to withhold income tax on the value of an employee's personal use of a highway motor vehicle you provided. You do not have to make this choice for all employees. You can withhold income tax from the wages of some employees but not others. You must, however, withhold the applicable social security and PJledicare taxes on such benefits. You can choose not to withhold income tax on an employee's personal use of a highway motor vehicie by: • Notifying the employee as described below that you choose not to withhold and • Including the value of the benefits in boxes 1, 3, 5, and 14 on a timely furnished Form W-2. For use of a separate statement in lieu of using box 14, see the Instructions for Forms W-2 and W-3. The notice must be in writing and must be provided to the employee by January 31 of the election year or within 30 days after a vehicle is first provided to the employee, whichever is later. This notice must be provided in a man- ner reasonably expected to come to the attention of the affected employee. For example, the notice may be mailed to the employee, included with a paycheck, or posted where the employee could reasonably be expected to see it. You can also change your election not to withhold at any time by notifying the employee in the same manner. Amount to report on Forms 941 (or Form 944} and W-2. The actual value of fringe benefits provided during a calen- dar year (or other period as explained under Special ac- counting rule, earlier) must be determined by January 31 of the following year. You must report the actual value on Forms 941 (or Form 944) and W-2. If you choose, you can use a separate Form W-2 for fringe benefits and any other benefit information. Include the value of the fringe benefit in box 1 of Farm W-2. Also include it in boxes 3 and 5, if applicable. You may show the total value of the fringe benefits provided in the calendar year or other period in box 14 of Form W-2. However, if you provided your employee with the use of a highway motor vehicle and included 100% of its annual lease value in the employee's income, you must also report it separately in box 14 or provide it in a separate statement to the employee so that the employee can com- pute the value of any business use of the vehicle. If you use the special accounting rule, you must notify the affected employees of the period in which you used it. You must give this notice at or near the date you give the Form W-2, but not earlier than with the employee's last paycheck of the calendar year. How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get informa- tion from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help. Contacting your Taxpayer Advocate. The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers who are experienci~~g economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should. You can contact the TAS by calling the TAS toll-free case intake line at 1-877-777-4778 or TTY/TDD 1-800-829-4059 to see ifi you are eligible for assistance. You can also call or write to your local taxpayer advocate, whose phone number and address are listed in your local telephone directory and in Publication 1546, Taxpayer Advocate Service -Your Voice at the IRS. You can file Publication 15-8 (2008) Page 25 Form 911, Request for Taxpayer Advocate Service Assis- tance (And Application for Taxpayer Assistance Order); or ask an IRS employee to complete it on your behalf. For more information, go to www.irs.gov/advocate. Taxpayer Advocacy Pane! (TAP). The TAP listens to taxpayers, identifies taxpayer issues, and makes sugges- tionsfor improving IRS services and customer satisfaction. If you have suggestions for improvements, contact the TAP, toll free at 1-888-912-1227 or go to www. impraveirs. org. Low Income Taxpayer Clinics (LITCs}. LITCs are in- dependent organizations that provide low income taxpay- ers with representation in federal tax controversies with the IRS for free or for a nominal charge. The clinics also provide tax education and outreach for taxpayers with limited English proficiency or who speak English as a second language. Publication 4134, Low Income Taxpayer Clinic List, provides information on clinics in your area. It is available at www.irs.gov or at your local IRS office. Free tax services. To find out what services are avail- able, get Publication 910, IRS Guide to Free Tax Services. It contains a list of free tax publications and describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics. Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities. Internet. You can access the IRS website at www.irs.gav 24 hours a day, 7 days a week to: • E-file your return. Find out about filing and payment options for business returns. • Download forms, instructions, and publications. • Order IRS products online for delivery by mail. • Research your tax questions online. • Search publications online by topic or keyword. • View Internal Revenue Bulletins (IRBs) published in the last few years. • Sign up to receive local and national tax news by email. • Get information on starting and operating a small business. © Phone. Many services are available by phone. • Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current-year forms, instruc- tions; and publications; and prior-year forms and in- structions. You should receive your order within 10 working days. • Rsking tax questions. Call the IRS with your tax questions at 1-800-829-4933. ~ Solving problems. You can get face-to-face help solving tax problems every business day in IRS Tax- payer Assistance Centers. An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local Taxpayer Assistance Center for an appointment. To find the number, go to www.irs.gov/locatcontacts or look in the phone book under United States Govern- ment, Internal Revenue Service. • TTY/TDD equipment. If you have access to TTY/ TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications. • TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics. Evaluating the qualify of our telephone services. To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to listen in on or record random telephone calls. Another is to ask some callers to complete a short survey at the end of the call. ® Walk-in. Many products and services are avail- able on a walk-in basis. Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, li- braries, grocery stores, copy centers, city and county government offices, credit unions, and office supply stores have a collection of products available to print from a CD or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Inter- nal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for re- search purposes. Services. You can walk in to your local Taxpayer Assistance Center every business day for personal, face-to-face tax help. An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you're more comfortable talking with someone in person, visit your local Taxpayer Assistance Center where you can spread out your records and talk with an IRS representative face-to-face. No appointment is necessary; but if you prefer, you can call your local Center and leave a message requesting an appoint- ment to resolve a tax account issue. A representa- tive will call you back within 2 business days to schedule an in-person, appointment at your conve- nience. To find the number, go to www.irs.gov,~local- contacts or look in the phone book under United States Government, Internal Revenue Service. Page 26 Publication 15-B (2008) Mail. You can send your order for forms, instruc- ~ ' tions, and publications to the address below. You should receive a response within 10 days after your request is received. National Distribution Center P.O. Box 8903 Bloomington, IL 61702-8903 CD/DVD for tax products. You can order Publi- cation 1796, IRS Tax Products CD/DVD, and obtain: • Current-year forms, instructions, and publications. • Prior-year forms, instructions, and publications. • Bonus: Historical Tax Products DVD -Ships with the final release. • Tax Map: an electronic research tool and finding aid. • Tax law frequently asked questions. • Tax Topics from the IRS telephone response sys- tem. • Fill-in, print, and save features for most tax forms. • Internal Revenue Bulletins. • Toll-free and email technical support. • The CD which is released twice during the year. - The first release will ship the beginning of January 2008. - The final release will ship the beginning of March 2008. Purchase the CDIDVD from National Technical Informa- tion Service (NTIS) at www.irs.gov/cdorders for X35 (no handling fee) or call 1-877-CDFORMS (1-877-233-6767) toll free to buy the CD/DVD for $35 (plus a $5 handling fee). Price is subject to change. CD for small businesses. Publication 3207, The • Small Business Resource Guide CD, is a must for every small business owner or any taxpayer about to start a business. This year's CD includes: • Helpful information, such as how to prepare a busi- ness plan, find financing for your business, and much more. • A11 the business tax forms, instructions, and publica- tions needed to successfully manage a business. • Tax law changes. • Tax Map: an electronic research tool and finding aid. • Web links to various government agencies, business associations, and IRS organizations. • "Rate the Product" survey-your opportunity to sug- gest~changes for future editions. • A site map of the CD to help you navigate the pages of the CD with ease. • An interactive "Teens in Biz" module that gives prac- tical tips for teens about starting their own business, creating a business plan, and filing taxes. An updated version of this CD is available each year in early April. You can get a free copy by calling 1-800-829-3676 or by visiting www.irs.gov/smailbiz. Publication 15-8 (2008) Page 27 ;~-~- To help us develop a more usefiul index, please let us know if you have ideas for index entries. Index l~ See "Comments and Suggestions" in the "Introduction" for the ways you can reach us. A Accident benefits .............. . .... .... 6 Achievement awards ............... .... 6 Adoption assistance ........ . ....... .. . . 7 Annual lease value .................. .. 22 Annual lease value table ............ .. 22 Assistance (See Tax help) Athletic facilities .................... .... 7 Automobile (See Vehicles) Awards, achievement ............... .... 6 C Cafeteria plans ...................... .... 2 Cents-per-mile rule ................. 1, 20 COBRA premiums .................. .... 6 Comments on publication .......... .... 2 Commuter highway vehicle ......... .. 17 Commuting rule .......... . ......... .. 21 Copying machine use ............... .... 8 D Daily lease value .................... .. 23 De minimis (minimal) benefits: In general ......................... ....8 Meals ............................. .. 14 Transportation ..................... .. 17 Demonstrator cars .................. .. 18 Dependent care assistance ......... .... 8 Deposit rules ....................... .. 24 Discounts for employees ........... .... 9 E Educational assistance ............. .... 9 Employee benefit programs: Accident and health benefits ........ .... 6 Cafeteria plans .................... ....2 Dependent care assistance ........ .... 8 Educational assistance ............. .... 9 Group-term life insurance .......... .. 10 Employee discounts ................ .... 9 Employee stock options .... . ....... .. 10 Employer-operated eating facility ... .. 14 Exclusion rules ..................... ....3 F Fair market value ................... .. 20 Free tax services ................... .. 25 Fringe benefit overview ...... . ...... .... 2 Fringe benefits: Special accounting rule ............ .. 25 Valuation rules ..................... .. 19 G General valuation rule ............... . 20 Group-term life insurance ........... . 10 H Health benefits ..................... ..... 6 Health Savings Accounts ... . ...... ... 12 Help (See Tax help) Holiday gifts ....................... ..... 8 insurance: Accident and health ............... ..... 6 Group-term life ................... ... 10 Long-term care ................... .....6 L Lease value rule ................... ... 21 Length of service awards .......... ..... 6 Life insurance: Group-term ....................... ... 10 Spouse or dependent ............. ..... 8 Lodging ............................ ... 13 Long-term care insurance ......... ..... 6 M Meals: De minimis ....................... ... 14 On your business premises ....... ... 14 Medical reimbursement plans ..... ..... 6 Minimal benefits ................... ..... 8 More information (See Tax help} Moving expense reimbursements.. ... 15 N No-additional-cost services ........ ... 16 Nonpersonal-use vehicles, qualified ......................... ... 18 Options on stock .................. ... 10 Outplacement services ............ ... 19 Overview of fringe benefits ........ ..... 2 P Parking, qualified .................. . 1, 17 Parties ............................. .....8 Performance of services ........... ..... 2 Pickup trucks ...................... ... 19 Picnics ............................. .....8 Prorated annual lease value ....... ... 23 Provider defined ................... ..... 2 Publications (See Tax help) Q Qualified nonpersonal-use vehicles ......................... ... 18 Qualified transportation benefits .. ... 17 R Recipient defined .............. ......... 2 Reimbursements, moving expense ..................... ....... 15 Reporting rules ................ ....... 24 Retirement planning services .. ....... 16 Safety achievement awards .... ......... 6 Self insurance (medical reimbu rsement plans) ........................ .........6 Services, no-additional-cost ... ....... 16 Special accounting rule ........ ....... 25 Stock options, employee ...... ....... 10 Suggestions far publication ... ......... 2 T Tax help ....................... ....... 25 Taxable benefits ............... ......... 2 Taxpayer Advocate ............ ....... 25 Tickets for entertainment or sporting events ....................... .........8 Transit pass ................... ..... 1, 17 Transportation benefits: De minimis ................... ....... 17 Qualified .... . ................ ....... 17 TTY/TDD information .......... ....... 25 Tuition reduction .............. ....... 18 u Unsafe conditions commuting rule ................................. 23 v Valuation rules ..... . .................. 19 Vans .................................. 19 Vehicles: Business use of (See Working condition benefits) Commuter highway .................. 17 Qualified nonpersonal use ............ 18 Valuation of .......................... 20 W Withholding rules .................... . 24 Working condition benefits ........... 18 Page 28 Publication 15-B (2008) Annual Costs FMV Miles Comm Rule Troy 3444.00 4100.80 699.00 Mark 3924.00 122.65 669.00 Wade 3516.00 613.25 669.00 Dave 4284.00 1531.20 696.00 Oncall Water Oncall Angela 547.20 164.16 156.00 Oncall Rich 532.80 33.18 156.00 Oncall Pete 696.00 94.38 156.00 Oncall Steve 532.80 31.46 156.00 Oncall Dick 398.40 172.17 156.00 Oncall Electric 4044.00 780.00 Oncall Scott 126.10 Oncall Shane 243.61 Oncall Tom 287.95 Oncall Chad 299.87 Oncall Jeff 70.80 Oncall Chris 63.88 Oncall Troy 390.45 Oncall Art 100.12 Oncall Lex 262.21 Oncall Lloyd 102.98 Oncall Wade 62.69 Oncall Mike 79.14 Security 1320.00 5687.00 705.00 MINNESOTA STATUTES 2008 471.666 471.666 PERSONAL USE OF PUBLICLY OWNED AUTOMOBILES PROHIBITED. Subdivision 1. Definitions. For purposes of this section, the following definitions shall apply: (a) "Local government vehicle" means a vehicle owned or leased by a political subdivision of the state of Minnesota or loaned to a political subdivision. (b) "Political subdivision" means a statutory or home rule charter city, county, town, school district, metropolitan or regional agency, or other special purpose district of this state. (c) "Local government employee" or "employee" means an individual who is appointed or employed by a political subdivision, including all elected officials of political subdivisions. Subd. 2. Restricted uses. A local government vehicle may be used only for authorized local government business, including personal use that is clearly incidental to the use of the vehicle for local government business. A local government vehicle may not be used for transportation to or from the residence of a local government employee, except as provided in subdivision 3. Subd. 3. Permitted uses. A local government vehicle may be used by a local government employee to travel to or from the employee's residence: (1) in connection with work-related activities during hours when the employee is not working; (2) if the employee has been assigned the use of a local government vehicle for authorized local government business on an extended basis, and the employee's primary place of work is not the local government work station to which the employee is permanently assigned; or (3) if the employee has been assigned the use of a local government vehicle for authorized local government business away from the work station to which the employee is permanently assigned, and the number of miles traveled, or the time needed to conduct the business, will be minimized if the employee uses a local government vehicle to travel to the employee's residence before or after traveling to the place of local government business. Subd. 4. Exceptions. This section does not apply to public safety vehicles that are owned or leased by a political subdivision. History: 1993 c 315 s 16 Copyright ©2008 by the Revisor of Statutes, State of Minnesota. All Rights Reserved. c. The employee refuses the Utilities order to perform an aclion that the employee has an objective basis in fact to believe violates any State or Federal law or rule regulation adopted pursuant to law and the employee informs the Utility that the order is being refused for that reason. d. No city official or law enforcement official will disclose, or cause to disclose the identity of any employee making a report or providing information under this section without the employee's consent unless the investigator determines that disclosure is necessary for prosecution, the employee will be informed prior to the disclosure. c". t~.nipiGyeeS Siiali nvt make any statements OY dlsclostlreS pursuant t0 the this section knowing that they are false or that they are in reckless disregard of the truth. f. This section does not permit disclosures that would violate federal or state law or diminish or impair the right of any person to the continued protection of confidentiality or communications provided by common law. 6. WORKING HOURS A regular work week shall be five (5), eight (8) hour days. This will constitute a forty (40) hour work week. Non-exempt employees are paid on the basis of hours worked. Exempt employees are paid on a salary basis; their compensation is not based on the number of hours they work. 7. OVERTIME Time and one-half will be paid to all employees who work in excess of their regularly scheduled forty (40) hour work week, or eight (8) hour day. Double-time will be paid for all work performed on Sundays or Holidays. Certain supervisory employees are exempt from the overtime provisions. These employees do not receive overtime compensation, but have more flexible work schedules. 8. CALL OUT TIME Employees who. are asked to report for work outside their regular working hours shall be paid a minimum of two (2) hours each time they report for work. If an employee reports for work before or remains after the regular eight (8) hour work day, or works on a Saturday, Sunday or Holiday, he/she will be paid at the applicable overtime rate. Scheduled work contiguous to normal working hours shall not be subject to a two (2) hour minimum overtime obligation. 9. ON-CALL Certain regular field workers are required to be on call for one (1) week periods on a rotation basis. Compensation is eight (8) hours of overtime pay. If a holiday falls within \\ermuserver\home$\peggy\Misc. Manuals\MISC MANUAL ITEMS\Employee Handbook 2007.doc 4 Revision April 2008 the on-call week, compensation will be two (2) hours of overtime per holiday. Residency rules for field workers who stand after hours duty is: The employee must live within a twelve (12) mile radius of the power plant. Exceptions will be heard by the Utilities Commission. 10. RE-CONNECTS AND BONUS PAY Re-connects will be paid at a rate of $50.00 per re-connection. Bonus pay of 3% of current lineman's base pay shall be added to the senior lineman's pay who assumes the duties of lead-lineman when lead-lineman is absent due to vacation, sick, etc. Bonus pay shall be paid during normal work hours or afterhours. During afterhours call out, bonus pay will only be paid in the absence of alead-lineman. 11. PAYCHECK DEDUCTIONS By law, the Utility is required to withhold Federal, State, FICA and PERA from an employee's pay. The Utility also has a Health Care Savings Plan with mandatory participation and will withhold applicable amounts from an employee's pay. In addition, the following deductions will be made when authorized by a participating employee: a. Employee share health insurance h. World Vision b. Credit Union i. United Way c. PERA life insurance d. Deferred compensation e. Flexible benefits f. Security System purchase/time payments g. Computer Loans $1,200.00 (12 months) 12. 457 DEFERRED COMPENSATION Deferred Compensation Plan 457 The Elk River Municipal Utilities, as an employer, will match funds contributed by an employee, up to 3% of their base annual salary, with a cap of $2,000.00. Funds will be with Minnesota State Deferred Compensation Plan and/or Wenzel & Associates' ING Plan: Employer contribution will be made May 31st of each plan year for the employee. 13. SALARY ADVANCES Advance payment of earned wages or salaries may be made in an emergency or when an employee's regular payday falls within a vacation period or leave of absence. Except in cases of emergency, requests for advance payment of wages or salary should be made one week in advance. \\ermuserver\home$\peggy\Misc. 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T ~f, ~ ~ W ~ ~ ~~ ~ ~ ~y~r~ ~ ~ ~ ~ ~ .~ ~ ~ ~ ~ .~ i~ ~ o ~, ~ .~ N .~ ~ ~ ~ ~ a' O O ~ ~ O ~ ~ ~ ~ FWD ~ ~ ~~ O ~ O ~ O .~ ~ it ~, v O ~ p~ o~ v '~ 0 0 a~ ~ ~ o ~ ~ b ~ O ~ • ~ ~ ~+ ,1 ~~+~ °. x ~ ~ ~ ~ .o ~ ~~ ~ ~ N ~} _~ ~ ~ ~ ~ ~ a O m ~ ~ ~ ~w ~ ~ o ~ ~ v ~ , ... ,~ ~, ~, o ~ ~ o ~ ~ ~ o v ~ ~ ~ ~ ~ o o .~ ~ ~ v ~, ~ ~ ~ ~ ~ ~ ~ Ci. w ~ .,~ v . v ~ ~ .~ ~ ~ v o a--+ ~, .~ ~ :s '~ bA o v v v }-~ o tin ~ ~ ~ y._, V C/] O .~,. 7 ~ i bA ~ it ,.~ '~~'" ~ (~ ~ O `-~" N Q" ~ ~ O bA ~" ~ a S-~ ' V ~ ~ ' ~ ~ ~ ~ N v ~ ~ N ~ ',~, ~ ,~ v ~, ~ +~ ~ ~ ~ cri v' +, O ~ ~ .~, "' ~., O ~ O 'O v ~+ S3, O ~, c~ ~ ~ O ~ ~ ~" p ~ ~ d ~ ~ ~ ~ N G ~' O C ~ ~ ~ ~ 3 ~ ~ '+~ ~ ~ cn ~ ~ iw ~, ~ ~ ~ '~ o. o ~ v .y ~' ~ ~ ~ -~ ~ ~ C .~ ° ~ ~. ~ ~ o W ~ ~ ~+. its bf~ ~ 'L3 ~ ~ W . ~ ~ G N ~ ~ 3 ~ ~ • • • • p~~~ v ~ N 0 ~ ~ ~ ~ ~ ~ ~ ~ '~ cC ,~ SZ. cC O v its m cn W ~ ,~ . ~ ~ Tj ~ cn v p ~ v ~ id ~ ~ •,T,~ ~ v ~ v ~ v O .~ ~ ~ >~ '~ s~ u v x o a~ ~. ~ w ~ ~ Q.. •~ m~ '~ 3 O ~' W D v _ ~ ~ ~ o ~ V ~ ~~, ~ O v v +~ ~ O~ .w cn .D S~ ¢, S~ ~ v ++ '+; ~s ~ V p ~ +~ O '~ its cn s.'' ~'" >~ ~ cC -~-' ~ ~ ~ ~ ~ ~ ~ O ~: ~ ~~ m ~ o ~ Q, m ~ O ~ ~ -~ ~ w ~ v N sti ~ ~ -~i W w'5h v ~,~~ ° ~~ LIST OF CITIES WITH ERMU SECURITY ACCOUNTS THAT ARE OUTSIDE THE CITY LIMITS OF ELK RIVER Monticello Milaca Big Lake Roseville Saint Francis Arden Hills Clearwater Crystal Zimmerman Onamia New Hope Maple Lake Andover Woodbury Brooklyn Center Ham Lake Cross Lake Minnetonka Hoyt Lakes Breezy Point Becker East Bethel St. Michael Champlin Oak Grove Cedar Rogers Corcoran. Princeton Maple Plain Circle Pines Delano Shoreview Hassan New Brighten Columbus Township Lakeville Tamarack Annandale Forest Lake Minneapolis Robbinsdale Now Then Coon Rapids Dayton Fridley Otsego Brooklyn Park Anoka Ramsey St. Augusta Albertville Maple Grove Webster Wi. Blaine