Key Takeaways
- Fringe benefits are taxable unless specifically excluded.
- Working condition fringes: excluded if employee could deduct as business expense.
- Employee discounts: 20% for services, gross profit % for products.
- Transportation fringes (Tax Year 2024): $315/month parking and transit.
- Education assistance: $5,250/year tax-free.
- Nondiscrimination required for most fringes (except working condition).
Last updated: January 2026
Fringe Benefit Rules
Why This Matters for the Exam
Fringe benefits are heavily tested. Know which benefits are excluded, the specific limits, and the nondiscrimination rules.
Expect at least 3-4 questions on fringe benefits.
General Rule
| Principle | Description |
|---|---|
| Default | All compensation is taxable (§61) |
| Exception | Specific exclusions in the Code |
| Valuation | FMV minus employee payment |
Categories of Excluded Fringes
| Fringe Type | Tax Treatment |
|---|---|
| No-additional-cost service | Excluded (nondiscrimination required) |
| Qualified employee discount | Excluded within limits |
| Working condition fringe | Excluded (no nondiscrimination required) |
| De minimis fringe | Excluded |
| Qualified transportation | Excluded within limits |
| Education assistance | Excluded up to $5,250 |
Working Condition Fringes
| Feature | Rule |
|---|---|
| Definition | Benefit employee could deduct if paid themselves |
| Examples | Professional dues, business use of car, trade journals |
| Discrimination | CAN be discriminatory and still excluded |
Qualified Employee Discounts
| Product/Service | Maximum Exclusion |
|---|---|
| Services | 20% of selling price |
| Products | Employer's gross profit percentage |
| Discrimination | Must be nondiscriminatory |
Employee Discount Example
| Item | Calculation |
|---|---|
| Service price | $1,000 |
| 30% discount given | $300 |
| Maximum exclusion (20%) | $200 |
| Taxable to employee | $100 |
Transportation Fringes (Tax Year 2024)
| Benefit | Monthly Limit |
|---|---|
| Transit passes | $315 |
| Vanpooling | $315 |
| Qualified parking | $315 |
| Combined transit + parking | $315 + $315 = $630 |
Employer Deduction Warning
| Rule | Treatment |
|---|---|
| Pre-TCJA | Employer could deduct |
| Tax Year 2024 | Employer generally CANNOT deduct |
| Employee | Still tax-free within limits |
Education Assistance (§127)
| Element | Rule |
|---|---|
| Annual exclusion | $5,250 |
| Courses | Undergraduate or graduate |
| Includes | Tuition, fees, books |
| Discrimination | Must be nondiscriminatory |
De Minimis Fringes
| Examples | Tax Treatment |
|---|---|
| Occasional meal money | Excluded |
| Holiday turkey | Excluded |
| Personal use of copier | Excluded |
| Cash (any amount) | ALWAYS taxable |
Nondiscrimination Requirements
| Fringe | Discrimination Allowed? |
|---|---|
| Working condition | Yes |
| Employee discounts | No |
| No-additional-cost | No |
| Cafeteria plan benefits | No |
Consequence of Discrimination
| If Discriminatory | Result |
|---|---|
| Non-HCEs | Still excluded |
| HCEs | FULLY taxable |
Real-World Scenario
Scenario: Company provides $400 monthly transit pass to employee.
- Tax Year 2024 limit: $315/month.
- Excluded: $315.
- Taxable to employee: $85/month ($400 - $315).
On the Exam
Expect 3-4 questions on fringes, typically:
- Discount Questions: "30% service discount—how much taxable?"
- Transportation Questions: "What is the 2024 monthly transit limit?"
- Discrimination Questions: "Which fringe can be discriminatory?"
The key is to remember: Working condition = can discriminate. Discounts = 20% services/GP% products, must be nondiscriminatory. Transit/parking = $315/month (Tax Year 2024). Education = $5,250.
Test Your Knowledge
Employer gives 30% discount on $1,000 service. How much taxable to non-HCE?
A
B
C
D
Test Your Knowledge
Tax Year 2024 monthly transit pass limit?
A
B
C
D
Test Your Knowledge
Which fringe can be provided only to executives and still be excluded?
A
B
C
D