Employees are not taxed on the receipt of services usually sold by their employer to customers where the employer does not incur additional costs in providing them to the employees. Examples are free or low-cost flights provided by an airline to its employees; free or discount lodging for employees of a hotel; and telephone service provided to employees of telephone companies. These tax-free fringes also may be provided to the employee’s spouse and dependent children; retired employees, including employees retired on disability; and widows or widowers of deceased or retired employees. Tax-free treatment also applies to free or discount flights provided to parents of airline employees. Benefits provided by another company under a reciprocal arrangement, such as standby tickets on another airline, may also qualify as tax free.
The employer must have excess service capacity to provide the service and not forego potential revenue from regular customers. For example, airline employees who receive free reserved seating on company planes must pay tax on the benefit because the airline is foregoing potential revenue by reserving seating that could otherwise be sold.
If a company has two lines of business, such as an airline and a hotel, an employee of the airline may not receive tax-free benefits provided by the hotel. However, there are exceptions. An employee who provides services to both business lines may receive benefits from both business lines. Benefits from more than one line in existence before 1984 may also be available under a special election made by the company for 1985 and later years. Your employer should notify you of this tax benefit.
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