No Additional Cost Services Exclusion

Course: Income Tax Planning
Lesson 6: Employer-Sponsored Total Income Exclusions

Student Question:

For “No Additional Cost Services” provided by an employer, which are excluded from employee income, there is the requirement that no significant costs are incurred.  How is “significant” cost determined? Significant sounds subjective. Is there a general rule for determining what is considered significant?

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Instructor Response:

The IRS also uses the word “incidental” and provides a number of examples such as the cost of using the company copy machine or the cost of an airline employee traveling in an otherwise empty seat. 

The IRS does provide limited, specific guidance however:

• Products sold to employees below cost result in compensation income to the employee and
• Discounts to employees on services in excess of 20% is compensation income to employees.