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Wednesday, August 21, 2013

Logo Work Clothes May not be Taxable













Alabama@Work
By: Tommy Eden, Attorney

On February 5, 2010 - The Internal Revenue Service (IRS) released a private letter ruling that the value of small items such as shirts, gloves, and hats provided by employers can be excluded from workers' taxable income. The exemption for the clothing items falls under an IRS rule allowing an income exclusion for benefits of minimal value where determining that value is "unreasonable or administratively impracticable," the de minimus fringe benefit rule in Code Section 132(a)(4)states: “The term “de minimis fringe” means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees) so small as to make accounting for it unreasonable or administratively impracticable. Section 1.132-6(b)(1) of the Treasury Regulations states:

Generally, the frequency with which similar fringes are provided by the employer to the employer's employees is determined by reference to the frequency with which the employer provides the fringes to each individual.“

According to the letter, the employer provides items such as tee shirts, polo shirts, sweaters, jackets, swimsuits, socks, sweatshirts, coats, pants, jeans, shorts, gloves, hats, fanny packs, belts, clip-on ties, and equipment bags bearing the employer's logo. The employer said it provided the items twice annually at the most.

In the Analysis portion of the letter the IRS stated: “The Code and Regulations require Taxpayer to establish that the value of the items it seeks to exclude as de minimis fringes is so low as to make accounting for them administratively impracticable. Neither the Code nor the Regulations specify a particular value above which an item can no longer be considered a de minimis fringe.” On the issue of the difficulty of accounting for the gifts, generally an "objective guidepost" would be if the cost of determining an item's value would be greater than the cost of the benefit.”

The IRS ultimately agreed that the employer's provision of logo work clothing items would qualify for the income tax exemption. The IRS cited the lack of precise cost information from vendors, the difficulty of establishing fair market value, and the costs that would have to be incurred to track the value received by each employee given the employer's large and decentralized structure.

Ruling is available at http://www.irs.gov/pub/irs-wd/1005014.pdf

However, on May 20, 2011, the IRS revoked that Private Letter Ruling: http://www.irs.gov/pub/irs-wd/1135022.pdf
Common Sense Counsel: if you give any of the logo items to your employee listed above, you need to read this IRS letter (and revocation letter) and give your accountant a copy. Otherwise your employees may have a taxing problem when they wear your stuff.


Tommy Eden is a Lee County native, an attorney with the local office of Constangy, Brooks & Smith, LLP and a member of the ABA Section of Labor and Employment Law and serves on the Board of Directors for the East Alabama SHRM Chapter. He can be contacted at teden@constangy.com or 334-246-2901. Blog at www.alabamaatwork.com