What Does De Minimus Mean for Business Taxes?
What Does "De Minimis" Mean?
The term de minimis is generally used to describe something that is too small or insignificant to be considered, something unimportant. the term comes from a Latin phrase, "de minimis non curat lex," which means that the law does not deal with trivial matters. This term has several meanings in different areas of business. (Note the spelling of this term. It isn't spelled, as you might think, "de minimus" but it's "de minimis.")
In law, de minimis refers to something that is too small to bother with. For example, in a lawsuit over a $1 million account, a $10 error would be de minimis.
Why Is the Concept of De Minimis Important for Business Taxes?
In business taxes, the concept of de minimis is important in employee benefits, in capital gains taxes, and in other business tax areas. A small benefit may not be subject to tax; the amount varies depending on the case.
What Does De Minimis Mean for Employee Benefits?
The IRS 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.
Benefits that an employer provides to an employee are taxable as income to the employee. But a de minimis benefit is not taxable to the employee as income. From a tax standpoint, a de minimis benefit is a small amount of an employee benefit, and the IRS says these small amounts are not subject to taxation. In other words, if the benefit is de minimis, it's not taxable to the employee. If it's not de minimis, it is taxable to the employee, just like other employee benefits.
Examples of Employee Benefits that Might be De Minimis
The examples below give an idea of what is considered de minimis. In some cases, it's because the amount is small (like the holiday turkey), and in other cases, it's 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.
- Other meals that might be considered de minimis would be the coffee and donuts at a staff meeting or occasional meals provided to employees who must work overtime.
- Occasional tickets to sporting events or theater (use of the company box at a hockey or basketball game, for example)
- Allowing employees to use the office copying machine occasionally, if you (the employer) can show it's being used at least 85% for business purposes.
- Group term life insurance under $2000.
- Occasional transportation fares (like a bus pass or parking ticket) you provide to employees.
What are NOT De Minimis Benefits
The following are never de minimis, according to the IRS:
Notice also the use of the word "occasional" in the list of de minimis benefits above. If a benefit is provided routinely, it's almost never de minimis.
De Minimis Benefits and Cell Phones
The IRS considers that employer-provided cell phones are de minimis if they are not part of the company's compensation to the employee and if they are provided for "substantial business reasons." Some examples are:
- If the employer needs to contact the employee at all times for work-related emergencies (for a data center manager, for example)
- If the employee needs to talk to clients when out of the office (in a sales position, for example),
- Or if the employee needs to contact business people in other time zones at times when the employee's office is closed (an international business manager who needs to talk to employees or clients in Tokyo, for example).
An Exception to the De Minimis Rule - Highly Compensated Employees
Like other taxes, the de minimis rule must be applied fairly. You cannot treat meals the company provides at an employer facility provided to high-level employees as de minimis if the same benefit isn't available to all employees, or to a group of employees within which the high-level employees are a part.
For example, if you have a special dining room for executives and no dining room (or no similar dining room) for other employees, you can't claim that the executive dining room was de minimis. If it isn't de minimis, it's taxable to the executives. The IRS has some language explaining what "highly compensated employees" means in this case.
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 and the date and time. Showing that you always keep good records will help you defend de minimis use in a tax audit.
Other Examples of a De Minimis Rule 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.
In another example, 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 bonds.
In copyright law, de minimis is used 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 considered de minimis varies by case.