|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
Personal Income Tax
The requirements for including certain fringe benefits in the taxable wages of employees for the purposes of determining Massachusetts gross income are different in 1986 from those in 1985. For taxable year 1986, Massachusetts gross income is Federal gross income as defined in the Internal Revenue Code of the United States (the "Code"), as amended on January 1, 1985, and in effect for the taxable year. G.L. c. 62 § 2(a), 1(c), (d). In taxable year 1985, however, Massachusetts gross income was determined by the Code as amended on February 1, 1983, and in effect for the taxable year. St. 1983, c. 233, § 11. Further, the recently passed Tax Reform Act of 1986, Pub. L. 99-514, October 22, 1986, 100 Stat. (1986) makes certain changes in the definition of federal gross income for 1986 that are not applicable to the Massachusetts definition of gross income for 1986. This Technical Information Release (TIR) describes the tax treatment of certain fringe benefits for Massachusetts income tax purposes in 1986 and compares that treatment with the taxation of those benefits at the federal level in 1986 and at the state level in 1985.
Property and Services Fringe Benefits
At Code § 132 the following fringe benefits are specifically excluded in computing federal gross income:
1) no-additional-cost services,
2) qualified employee discounts,
3) working condition fringe benefits, and
4) de minimis fringe benefits.
No-additional-cost services are services provided by an employer to an employee if the employer offers the service for sale to customers in the ordinary course of business and if the employer incurs no substantial additional cost. Examples of such services are excess-capacity hotel accommodations for hotel employees and excess-capacity air transportation for airline employees. U.S. Treas. Temp. Reg. § 1.132-2T.
Qualified employee discounts are discounts with respect to qualified property or services provided by an employer to an employee that does not exceed the gross profit percentage of the price of goods offered to customers, for discounts on goods, or 20 percent of the price of services offered to customers, for discounts on services. For example, a clothing store with gross receipts of $1 million and cost of goods sold of $650,000 has a gross profit percentage of 35 percent. If employees are allowed a discount on clothing purchases of 30% of the regular selling price, the discount is excludable from the employees' income. If the discount is 40%, the excess (5%) is included in the employees' income. H.R. Rep., Tax Reform Act of 1984, P.L. 98-369 reprinted at Fed. Tax P-H ¶ 8777 (1986).
A working condition fringe benefit is any property or services provided to an employee which would be deductible by the employee as an employee business expense under Code § 162 and § 167 if the employee had paid for it. For example, if an employer provides an employee with an automobile with an annual lease value of $3,100, and 75% of the use of the vehicle is for business purposes, then $2,325 (3,100 x .75) would be deductible as an employee business expense and thus excluded as a working condition fringe benefit. U.S. Treas. Temp. Reg. § 1.132-5T(b).
A de minimis fringe benefit is any property or service the value of which is so small as to making accounting for it unreasonable or administratively impractical. Examples of de minimis fringe benefits are occasional meal money or local transportation fare provided when an employee works overtime, coffee and donuts, occasional personal use of the employer's copying machine. U.S. Treas. Temp. Reg. § 1.132-6T.
Code § 132, enacted July 18, 1984, was effective for federal income tax purposes on January 1, 1985. Since in 1985 Massachusetts followed the Code in effect on February 1, 1983, these benefits were included in Massachusetts taxable income in 1985. For taxable year 1986 however, for both Massachusetts and federal tax purposes the fringe benefits described in Code § 132 and relevant regulations are excluded in computing gross income.
Group Legal Services
The benefits of qualified group legal service plans, described in Code § 120, are included in Massachusetts gross income in 1986. Such benefits were excluded from Massachusetts gross income in 1985 and also are excluded from federal gross income in 1986. Code § 120, as in effect on January 1, 1985, excluded these benefits from federal gross income only through December 31, 1985. The Tax Reform Act of 1986, supra, Act § 1162(b), extended the exclusion for federal tax purposes through December 31, 1987. Since the provisions of the Tax Reform Act of 1986 do not apply in determining an individual's Massachusetts gross income, the exclusion expired for Massachusetts income tax purposes. Thus, in taxable year 1986, benefits under qualified group legal service plans described at Code § 120 are excluded from federal gross income, but they are included in Massachusetts gross income.
The benefits from qualified educational assistance programs described at Code § 127 are included in Massachusetts gross income in 1986. The federal provisions in effect on January 1, 1985, excluding those benefits from taxable income, expired on December 31, 1985. The extension of the expiration date until December 31, 1987, in the Tax Reform Act of 1986, supra, § 1162(a), applies only to federal gross income and not to Massachusetts gross income. Thus, educational benefits qualified for exclusion from federal gross income under Code § 127 are included in Massachusetts gross income in 1986.
The value of lodging furnished an employee for the convenience of the employer and as a condition of employment has been excluded from federal gross income under Code § 119 since 1954. The Tax Reform Act of 1986, supra, § 1164, added Code § 119(d), effective for tax years beginning after December 31, 1985, which established criteria for excluding from gross income qualified campus housing provided to employees. With respect to Massachusetts gross income in taxable year 1986, an employee would generally include in gross income the value of housing provided by an educational institution, unless the requirements of Code § 119 (a) - (c) are met. The exclusions in Code § 119(d) added by the Tax Reform Act of 1986 do not apply for Massachusetts purposes.
Massachusetts state wages must be reported on federal form W-2. Massachusetts state wages for withholding purposes are wages as defined in Code § 3401(a) and periodic payments and nonperiodic distributions as defined in Code § 3405. Therefore, items of federal gross income reported on the W-2 as federal wages and items excluded from federal gross income but included in Massachusetts gross income must be reported as Massachusetts state wages on federal form W-2. G.L. c. 62C, § 8. Items of Massachusetts gross income which are excluded from federal gross income and which are not subject to federal withholding are not subject to Massachusetts withholding. Fringe benefits excluded from federal gross income under Code § 132 from taxable year 1986 are excluded from Massachusetts state wages. Qualified legal service plan benefits under Code § 120 and qualified educational assistance benefits under Code § 127 are excluded from federal gross income for taxable year 1986, but are included in Massachusetts states wages. Housing provided employees by an educational institution is generally included in Massachusetts state wages unless such benefits meet the strict requirements of Code § 119.
/s/Ira A. Jackson
Ira A. Jackson
Commissioner of Revenue
April 6, 1987