Certain employee discounts provided to employees on the selling price of qualified property or services of the employer are excludable from gross income. The main rule in this provision is that in order for the discount to be excludable, it must be available to employees on a non-discriminating basis.
The employee discount may not exceed the gross profit percentage normally offered by the employer to customers. In the case of qualified services, the excludable amount cannot exceed 20 percent of the price offered to nonemployee customers.
Qualified Employee Discount Examples
“Don’s company had total sales of $1,000,000 for 2012. The cost of merchandise for this period was $500,000. Therefore, the gross profit percentage was 50 percent. The employees were offered a 60 percent discount on merchandise purchased for the company. In this case, the employees had to include 10 percent of the value of the merchandise they purchased in their gross income.”
“James worked for a phone manufacturer. He bought a phone from the company and received the usual employee discount. James also received a one year parts and labor warranty for which no compensation was exchanged. Normally the company does not give this type of warranty. James does not have to include the value of the discount but does need to include the value of the warranty in his income.”
As you can see, these examples illustrate the procedures that need to be carried out for determining whether a discount or benefit would need to be included in gross income.
Officers and Owners
The value of the discounts can be excluded from the income of officers, owners, or highly compensated employees only if these discounts are made available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification setup by the employer that does not discriminate in favor of officers, owners, or highly compensated employees.