What Does "De Minimus" Mean in Business Taxes?
The term implies a lack of importance
The term "de minimis" describes something that's too small or insignificant to be of importance. It derives from the Latin phrase "de minimis non curat lex," which translates to "...about minimal things." A $10 error would be de minimis in a lawsuit over a $1 million account.
The concept of de minimis is important in employee benefits, in capital gains taxes, and in other business tax areas. A small benefit might not be subject to income tax. The amount can vary depending on circumstances.
What Does De Minimis Mean for Employee Benefits?
The Internal Revenue Service says 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 administratively impracticable."
Many benefits provided by employers are taxable as income to the employees, but a de minimis benefit is not. From a tax standpoint, a de minimis benefit is a small amount of employee compensation, and Internal Revenue Code section 132(a)(4) states that these small amounts are not subject to taxation. They're not worth the time and effort it would take to account for them.
Examples of Employee Benefits That Might Be De Minimis
These examples provide an idea of what is considered de minimis. In some cases, it's because the amount is small, like the holiday turkey, but it might also be that it's simply too difficult to sort out employee personal use from business use, like the office copier.
The IRS provides some examples of de minimis awards which can be excluded from taxes for employees:
- Holiday turkeys or hams
- Flowers, plaques, or coffee mugs for special occasions
- A gold watch on retirement
- Parking for an employee of the month if the amount doesn't exceed certain limits
- Occasional award dinners or holiday dinners for employees and guests
- Coffee and donuts at staff meetings, or occasional meals provided to employees who must work overtime
- Occasional tickets to sporting events or theater, such as the use of the company box at a basketball game
- Allowing employees to use the office copying machine occasionally if you can show that it's being used at least 85 percent of the time for business purposes
- Group term life insurance under $2,000
- Occasional transportation fares, such as a bus pass or parking ticket
What Are Not Considered De Minimis Benefits
The following are never de minimis, according to the IRS:
Notice the use of the word "occasional" in the list of de minimis benefits. A benefit is almost never de minimis if it's provided routinely.
De Minimis Benefits and Cell Phones
The IRS considers that employer-provided cell phones are de minimis if they're not part of the company's compensation to the employee and if they're provided for "substantial business reasons." Some examples include:
- The employer needs to contact the employee, such as a data center manager, at all times for work-related emergencies
- The employee must to talk to clients when she's out of the office, such as if she works in a sales position
- The employee must contact business people in other time zones at times when the employee's office is closed, like an international business manager who must regularly talk to employees or clients in Tokyo
An Exception to the De Minimis Rule
Like other taxes, the de minimis rule must be applied fairly. You can't treat meals the company provides at an employer facility to high-level employees as de minimis if the same benefit isn't available to all your employees.
For example, if you have a special dining room for executives and no dining room or similar dining room is available for other staff, you can't claim that the executive dining room is de minimis. And if it isn't de minimis, it's taxable to the executives.
Records to Prove De Minimis Benefits
It's always difficult to prove a negative. Keep excellent records of times when you provide small benefits to employees, explaining the business purpose, as well as the date and the time. Showing that you always keep good records will help you defend de minimis use in the event of a tax audit.
Examples in Other Tax and Legal Areas
The 2015 PATH Act provides protection against fines and penalties for business taxpayers for de minimis errors under $100 on information returns.
On Form 1099-S, Proceeds from Real Estate Transactions, a transfer of less than $600 is considered de minimis.
De minimis limits are considered in capital gains tax on the purchase of discount bonds. A discount of less than a quarter of a point per year is effectively too small to count for tax purposes.
De minimis is used in copyright law when determining whether a work is within the limits of fair use. A small amount of a work can be used without permission. The amount that's considered de minimis varies by case.