What Does "De Minimis" Mean in Business Taxes?
You might not need to pay taxes on some small benefits
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:
"... one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical."
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
Minimal or occasional employee benefits are considered de minimis. In some cases, it's because the amount is small, such as the holiday turkey. Other benefits are considered de minimis because it's simply too difficult to sort out employee personal use from business use, such as 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, coffee mugs, or other small gifts (other than cash) for special occasions.
- 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.
- Occasional personal use of the office copying machine 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:
- Cash, including cash equivalents like gift cards except for infrequent meal money to allow overtime work.
- Season tickets to theatres or sporting events.
- Use of the employer's apartment, vacation home, boat, or airplane.
- Commuting use of an employer’s vehicle more than once a month.
- Membership in a country club or athletic facility.
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 employer-provided cell phones 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 talk to clients when she's out of the office, such as if she works in a sales position.
- The employee must contact businesspeople 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.
Cell phones are not considered a de minimis benefit if the phone is provided:
- To promote the goodwill of the employee.
- To attract a prospective employee.
- As additional compensation to an employee.
An Exception to the De Minimis Rule
Like other taxes, the de minimis rule must be applied fairly. You can't treat benefits the company provides 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 detailed 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.
De Minimis 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.