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Below is a list of topics most commonly referred to regarding taxability.
Assignment of Income
Income earned is generally taxable to the payee at the time payments are made available to them.
The assignment of income doctrine provides that an individual, who assigns his or her right to receive income, rather than receiving the income directly, retains the tax liability associated with that income. Under this doctrine, an individual is not allowed to shift the taxation of income by making a gift or gratuitous transfer of income to another individual or organization, including the University. The assignment of income doctrine is summarized in IRS Revenue Ruling 69-102.
In order for travel meal reimbursements to be excludable from wages, employees must be traveling away from their tax home on their employer’s business. The tax home encompasses the general area of the taxpayer’s place of business. Traveling “away from home” means
- Employee must be traveling away from the general tax home area substantially longer than an ordinary day’s work, and
- Employee needs to obtain substantial sleep or rest to meet the demands of the work while away from home.
The IRS doesn’t specifically define sleep or rest, however, the Tax Courts have determined that sleep or rest is one that requires the securing of lodging. U.S. v. Correll, Barry v. Commissioner, Unger v. Commissioner Thunstedt, T.C memo 2013-280 and Rehman, T.C. Memo 2013-71.
IRC §1.62(a)(2), Rev. Ruling 75-170, Rev. Ruling 75-432
See Publication 463, Travel, Entertainment, Gift, and Car Expenses; Publication 5137 Fringe Benefit Guide
You can deduct the cost of meals in either of the following situations.
- It is necessary for you to stop for substantial sleep or rest to properly perform your duties while traveling away from home on business.
- The meal is business-related entertainment.
Meals Away From Tax Home But Not Overnight
Generally, these meals are taxable as wages to the employee because travel must be away from home overnight to be excludable.
Example: An employee is required to travel out of town to work for the day. The employer agrees to pay for the employee’s meals while away. The employee leaves home at 7:00 a.m. and returns home at 9:00 p.m. Before the employee returns in the evening, the employee takes a nap in his car for an hour. Although the employee is away from his tax home for substantially longer than a normal work day and even stops for rest, the rest is not considered to be substantial. The employee is not considered to be away from home overnight. Any meal money that the employee receives is taxable as wages.
Questions & Answers
Q:Why can’t I be reimbursed for the cost of my personal meals for same day travel, for example, if I leave at 6:00 a.m. and don’t return until 10 p.m.?
A:In accordance with IRS guidelines, an employee is required to need substantial sleep or rest to qualify for personal meal reimbursement. Substantial sleep or rest requires overnight lodging. Therefore, same day trips without an overnight stay will not qualify for personal meal reimbursement.
Q:What are the tax implications if I am reimbursed for a personal meal?
A:The reimbursement is considered a taxable fringe by the IRS and all such reimbursements are taxable income to the recipient and must be included as wages on the recipient’s W-2 at year end.
Q:What is an example of a taxable meal?
A:A University employee travels outside of the office on an assignment for the work day and does not require overnight lodging; he purchases lunch and requests reimbursement. Since there was no overnight lodging, the reimbursement is taxable income to the employee and is required to be included in their wages.
Q:If a faculty member takes a job candidate out for a meal, is the reimbursement taxable?
A:No, if there is a justifiable business purpose for taking the job candidate to lunch.
Q:If an employee takes some international visitors or other university guests out for a business-related dinner, is that considered taxable?
A:No, it is not a taxable dinner because there is a justifiable business-related purpose for the meal.
Q:If an employee goes to a conference Friday through Saturday, stays overnight both nights and leaves Sunday morning, is the breakfast on Sunday considered taxable?
A:No, because of the overnight stays, the Sunday meal is not taxable.
Q:Are meals that are provided for overtime work that exceeds the normal work schedule excludable from employee’s wages?
A:Generally yes, if all the following conditions are met, occasional meal money may be excludable from income as a de minimis fringe benefit:
- Occasional Basis – Meal is reasonable in value, and not provided regularly or frequently, and
- Provided for Overtime Work – Overtime work necessitates an extension of the employee’s normal work schedule, and
- Enables Overtime Work – Provided to enable the employee to work overtime. Meals provided on the employer’s premises that are consumed during the overtime period, or meal money expended for meals consumed during that period, satisfy this condition.
Regularly provided meal money does not qualify for the exclusion for de minimis fringes provided by an employer.
Business Use of Home
Please refer to the attached PDF flowchart
The costs of commuting to and from work are not deductible, either as trade or business expenses or as expenses incurred in the production of income. Instead, they are nondeductible personal expenses. The cost of commuting to and from work is not deductible even if it is essential to the taxpayer's pursuit of business activities that he have his car with him at work, or even if the taxpayer is on call and thus must have access to speedy and reliable transportation to his place of employment.
Compensation assigned to charity
A taxpayer generally can't avoid the tax on compensation paid for services he performs by having the amounts given directly to charity.
Primm, T., (1933) 28 BTA 13 .
If a person renders services to a third party for the benefit of a charitable organization, any amount paid under an agreement or understanding to the charity by the third party for those services is income to the person performing the services. It doesn't matter if the commitment to pay the earnings directly to the charity is made before the services are rendered. 14
Reg § 1.61-2(c) ; Rev Rul 58-495, 1958-2 CB 27 .
Dues paid to charity organization
Membership dues paid to charitable organizations or other qualifying professional organizations aren't deductible as charitable contributions if by reason of such membership the taxpayer receives benefits or privileges, such as publications, the use of a library, free or reduced admissions to concerts, lectures, etc.
But many cultural organizations, e.g., tax-exempt museums and symphonies, also solicit “sustaining” and similar members who pay much higher dues for the privilege of being known as benefactors of the organization. Where such dues have a dual character because of the great discrepancy between payments and benefits, IRS will give due consideration to the possible separation on a uniform basis of that portion of the total payment that may properly be treated as a charitable contribution.
Please refer to the attached PDF flowchart
Employee Gifts and Awards
The University of Pennsylvania recognizes the services of its employees while complying with federal, state, local and or other sponsor guidelines. The University of Pennsylvania establishes cost-effective practices that are consistently applied.
On occasion the University or an individual department, school or center will recognize employees for outstanding work-related achievement, a significant contribution, or a major milestone such as a promotion or retirement.
This document provides specific guidelines regarding the value and type of gifts or awards to employees and whether or not they are subject to payroll taxes.
When these occasions arise, we are reminded that:
1. Federally sponsored funds should never be used to charge employee gifts, morale building events, or celebratory/work related achievement events;
2. Departmental funds may be used at the discretion of the department within the criteria of this policy and the departmental budget.
The following guidelines have been developed according to the IRS regulations concerning gifts and awards to employees.
This policy does not cover ordinary business expenses in the promotion of employee morale.
Examples of such business expenses are: occasional business lunches and office gatherings. Nor does this policy cover performance-based awards or bonuses, which are generally taxable to the recipient and are processed through Payroll.
This policy is not applicable to prizes/awards given for established student events.
Furthermore, this policy does not preclude individual faculty or staff members from giving personal gifts to their colleagues provided University funds are not used for this purpose. Such personal gifts will not be reported as taxable income to the recipient.
1) It is not appropriate to spend any University funds in recognition of employees for non work-related achievement or events such as birthdays, holidays (Christmas, Hanukkah, Kwanza, etc.) weddings, baby showers, housewarming, etc.
2) Gifts and awards received by employees are taxable and must be reported as additional earnings if their value exceeds the following thresholds:
a) Cash or gift certificates of any value
i) the IRS considers gift certificates, gift cards or any savings bond to be a cash equivalent even if the property or service acquired with the gift certificate would normally be excludable
b) Gifts or awards of tangible personal property with a value greater than $100
i) Gifts and awards of tangible personal property to employees are “de minimis” when they are awarded infrequently and are not greater than $100
c) Gifts or awards of tangible personal property greater than $400 for a length of service or retirement award
i) These awards may not be made within the employee’s first five years of service or more frequently than every five years.
3) All taxable gifts and awards will be net of Federal, State, City and FICA payroll taxes. In other words, the total expense charged to the departmental funding source will equal the specified award amount; however the amount received by the employee will be net of the applicable taxes withheld.
WORK-RELATED ACHIEVEMENT AWARD GUIDELINES
Recognition may take the form of celebratory events such as a department-wide luncheon, dinner, or party. Appropriate circumstances for such recognition include:
To mark achievement of a major departmental goal;
To honor an employee in connection with a work-related employee recognition program;
To honor an employee who is leaving the University or department;
To honor a retiree (other than University wide recognition programs).
These costs should be treated consistent with the University’s general business expense guidelines.
Recognition may also be in the form of a gift. Appropriate circumstances for recognition by gifts include:
To honor an employee for achievement of a work-related goal or objective (non-bonus);
To honor a long-service employee, outside of a University-wide recognition program;
To honor an employee departing the University or department.
WHAT MAY NOT BE CHARGED
Celebratory events and gifts to honor an individual for personal reasons (e.g., wedding, baby shower, birthday, housewarming, holiday, etc.) may not be charged to University funds. Personal funds should be used to pay for these and other kinds of staff parties and for gifts for such events.
Flowers: The University will not pay or reimburse for payment of flowers, other than flowers of nominal cost sent upon the hospitalization of an employee or a death in the employee’s family.
Holiday Cards: The University will not pay or reimburse for payment of holiday cards for interoffice mailing. External mailings are allowable for purposes such as alumni and donor relations.
Taxability of Awards to Employees
|Cash and gift certificates of any value
|Tangible personal property – occasional and value not greater than $100
|Tangible personal property – value greater than $100 (does not include a length of service or retirement gift)
|Tangible personal property - valued in the range of $0 - $400 for length of service or retirement
|Tangible personal property valued greater than $400 for length of service or retirement. (Only the amount greater than $400 is taxable or reportable.)
Following is a clarification on the Internal Revenue Code regulations as well as our internal policies on the distribution of gift certificates and awards.
Because cash and cash equivalent fringe benefits, like gift certificates, have a readily ascertainable value, they do not constitute de minimis fringe benefits because accounting for these items is not unreasonable or administratively impracticable and are therefore taxable to the recipient.
De minimis Fringe Benefits; Taxability of Gift Certificates and other Awards
The IRS has issued an opinion that gift certificates, gift cards, and gift coupons which have a face value on them are considered cash equivalents and therefore are subject to employment taxes without regard to their value. This includes gift certificates which cannot be converted to cash. It may also include theater tickets and tickets to sporting events. Gift certificates or gift cards to Barnes and Noble, American Express, etc., which are given to employees for any reason and for any amount are taxable to the employee. A gift coupon operates the same way as a cash equivalent fringe benefit such as a gift certificate. Accordingly, its value must be included in the employee’s gross income (Technical Advice Memorandum 200437030).
The Internal Revenue Code (IRC) section 132(a) provides that de minimis fringe benefits are considered non-taxable, except when they are in the form of gift certificates, gift card or gift coupons. Although only employees may receive de minimis fringes, all recipients of fringe benefits are treated as employees for this purpose.
The exclusion for de minimis fringe benefits is limited to situations where the benefit provided by the employer is small in value. What constitutes an acceptable dollar limit is based on facts and circumstances which take into consideration the value and the frequency of the benefit as well as administrative practicability limitations. Guidance is provided that "non-monetary achievement awards having a fair market value of $100 or more would not qualify as a de minimis fringe".
In addition to being of small value, to qualify as de minimis, the benefit must be provided infrequently. Frequency is measured by the number of times a particular employee receives the benefit; that the benefit is not frequently provided to employees generally is irrelevant.
Some common de minimis fringe benefits include occasional cocktail parties or picnics; occasional supper money or taxi faire because of overtime work; traditional birthday or holiday gifts of property with a low fair market value; occasional tickets (not seasonal tickets) to the theater or sporting events; coffee, doughnuts, and soft drinks; group meals; local telephone calls; and flowers, fruit, books, turkeys or hams, or similar property provided under special circumstances, such as illness, outstanding performance, or family crisis provided the requirements of de minimis fringe benefit rules are otherwise met.
However, distribution of any cash fringe benefit (regardless of dollar value) is never excludable as a de minimis fringe benefit. For example; American Express gift certificates should be includible in an employee’s taxable income and treated as wages subject to withholding requirements, regardless of the dollar value.
In general, gift certificates as awards or incentives are in violation of current policies. However, the Senior Business Administrator and Dean must approve a policy waiver if the following conditions are met:
1) Written approval must be obtained from the Senior Business Administrator and Dean.
2) Department Documentation and Reporting Responsibilities for Employees
a) Departments that purchase cash converting gift certificates or that purchase certificates using a Procard, must provide a quarterly listing to the Manager of Payroll of the eventual certificate recipients. For the fourth quarter, the list of certificate recipients must be submitted by November 30. The Payroll Office will manually add to an employee's gross wage the value of any awards granted to an employee.
i) Questions should be addressed to firstname.lastname@example.org
b) Note: For tax reasons, employees should not be given cash converting gift certificates after November 30th of each year.
3) Special Nonresident Alien Requirements
a) Cash converting gift certificates awarded to nonresident aliens are subject to federal tax withholding. Withholding rates vary based on whether the recipient has applied and is eligible for tax treaty status and whether the treaty addresses such payments. The total amount of a cash converting gift certificate will be reported to the IRS on form 1042-S or W-2.
i) Questions should be addressed to: email@example.com.
4) Total Awards that Exceed $600 to Non-employees
a) If the total amount cash of converting gift certificates and other cash awards made to any individual other than employees or nonresident aliens exceeds $600 in a calendar year, the total cash equivalent value of awards made to the recipient will be reported to the Internal Revenue Service on Form 1099-misc as other compensation.
b) The department must collect a W-9 for each ‘award’ and submit a report quarterly to the Accounts Payable department which includes a listing of the recipients, the dollar value of the gift certificate/award and a copy of the W-9.
Please refer the Comptroller’s web site to review the policies associated with the distributions of gifts;
Policy #2326 Gifts Based on University/Employee Relationship,
Policy #2326.1 Gifts Based on Non University Personnel.
If you have any questions or concerns, please feel free to contact MaryAnn Piccolo at 215-898-8967 or via email firstname.lastname@example.org
Reimbursement of Sabbatical Expenses
The IRS would allow sabbatical expenses to be reimbursed if: 1. It is for research purposes 2. The research is in the employee’s field of study 3. The research cannot be performed elsewhere. As long as the 3 criteria are met, taxability should not be an issue for reimbursement of the travel expenses, regardless of a salary or no salary. If all 3 criteria are met, send the reimbursement to Travel.
In order to be prepared for an audit, a document stating the following needs to be included with the travel receipts:
- The University requires the employee to conduct the research (to prove that the research is not for personal reasons)
- What is the purpose of conducting the research and how will it benefit the Univ. of Penn.
- A statement that the research is in the employees field of study
- Why the research is being conducted at a location other than the Univ. of Penn.
Taxability of Relocation Expenses for Faculty and Staff
This guide sets forth tax implications to facilitate the moving of new University of Pennsylvania faculty and staff, where such action is considered to be in the best interests of the University. The Relocation Policy of the University of Pennsylvania is designed to give maximum flexibility to schools, departments and other organizational units while assuring compliance with Federal, State and Local regulations. The provisions of this policy apply only when an offer of employment is made. **
Frequently Asked Questions about Relocation and Moving Expenses (opens new page/browser tab)
Common Relocation Expenses
1) Reimbursement Reported as Additional Income- When applying this relocation policy, departments should be aware that the Internal Revenue Service (IRS) requires the University to report any reimbursements and advances associated with the move that are not in accordance to IRS guidelines as additional compensation income to the employee, subject to payroll taxes.
a) Additional reimbursements and advances if allowed by the University of Pennsylvania's relocation policy and reported as additional income, include but are not limited to the following:
i) House-hunting expenses
ii) Temporary living expenses
(1) All temporary living expenses are tax reportable, except for the day of departure from the old residence and the day of arrival in the new location
iii) Same-sex domestic partner moving expenses
iv) En route meals
v) Vehicle allowance over IRS approved mileage rate for moving
vi) Storage of household goods over 30 days
vii) Expenses for return trips to the employee's former residence
Guidance on tax issues may be obtained from the Comptroller's office. Further information about tax reporting of moving expenses may be obtained from the IRS website at http://www.irs.gov/formspubs/index.html Publication #521: Moving Expenses
2) Reimbursement Not Reported as Additional Income - Reimbursements and advances of “qualified moving expenses” are not tax reportable as additional income. However, these reimbursements are reported on form W-2 as information only. IRS guidelines identify the following criteria for “qualified moving expenses”.
a)The Job is:
i) A new job for the person being moved
iii) Expected to last at least 9 months if a new employee, or 12 months if a relocation of an existing employee
iv) At least 50 miles farther from the old residence than the old job was from the old residence.
b)Qualified Moving Expense includes reasonable costs for:
i) Moving household goods and personal effects. - All or part of the actual and reasonable expenses of moving the household goods of a new employee may be reimbursed.
(1) Qualified/Deductible Moving Expenses:
(a) The actual cost of packing, crating, transporting, unpacking, and uncrating household effects
(b) Costs incurred for moves to and from storage
(c) Storage Costs TAX NOTE: Taxable after 30 days
(d) Costs of connecting and disconnecting household equipment
(e)“All risk”replacement cost insurance (which should be arranged through the shipping agent or carrier)
(f) Household pets
(g) En route expenses
(h) Storage of household goods for up to 30 days
(2) Non-qualified/Non-deductible Moving Expenses:
(a) Storage charges other than for goods and effects in transit
(b) Costs incurred in the acquisition of property
(c) Costs incurred in the disposition of property
(d) Penalties for breaking leases
(e) Mortgage penalties
(f) Costs of refitting rugs or draperies
(g) Club dues, tuition dues and similar fees that have not expired at the form place of residence.
(i)TAX NOTE: Reimbursements received for nondeductible expenses are treated as additional income.
c)The Individual's whose expenses qualify are:
i) A new employee or current employee transferring to a qualified Job
ii) Members of the employee's household as defined by the IRS (The IRS does not recognize a domestic partner as a member of the employee's household. Therefore reimbursements will be taxable.)
3) Moving of Laboratories - Moving of laboratory supplies and equipment is a University of Pennsylvania business expense, not subject to IRS reporting.
**This outline applies to new University of Pennsylvania faculty and staff. Those employees covered by collective bargaining agreements should refer to the applicable agreement. All relocation expenses incurred and reimbursed to Post Doctoral candidates are subject to tax in their entirety.
Taxation of Student Prizes
Cash, gift certificates and other cash equivalents are taxable income to students regardless of value. The giving of these items as prizes are strongly discouraged.
Scholarship prizes won in a contest are not scholarships or fellowships if you do not have to use the prizes for your education. If you can use the prize for any purpose, the entire amount is taxable.
Taxable Scholarships and Fellowships
If you received a scholarship or fellowship, all or part of it may be taxable, even if you did not receive a Form W-2. Generally, the entire amount is taxable if you are not a candidate for a degree.
If you are a candidate for a degree, you generally can exclude from income that part of the grant used for:
Tuition and fees required for enrollment or attendance, or
Fees, books, supplies, and equipment required for your courses.
You cannot exclude from income any part of the grant used for other purposes, such as room and board.
Prizes & Awards
Prizes and awards are amounts received primarily in recognition of religious, charitable, scientific, educational, artistic, literary, civic achievement, or as the result of entering a contest. All prizes and awards (with the exception of qualified scholarships) are includible in gross income (Code Sec. 74 (a); Reg. § 1.74-1(b)) unless all of the following conditions are met:
a. The recipient was selected without any action on his or her part to enter the contest.
b. The recipient is not required to render substantial future services as a condition to receive the prize or award.
c. The prize or award is transferred by the payer to a government unit or tax-exempt charitable organization as designated by the recipient.
All three of the above conditions must be met in order to exempt the prize from taxation.
IRS Reporting Requirements
For US and resident alien students, all prizes in the amount of $600 or greater must be reported by the University to the IRS on form 1099-MISC. It is the responsibility of all prize recipients, regardless of the amount of the prize, to report the taxable prize received to the IRS on their personal income tax returns.
For non-resident alien students, the University is required to withhold 30% tax on the full amount of the prize unless the individual is exempt from taxation under a tax treaty. Contact Tax and International Operations at email@example.com or Room 308 Franklin Building (between 10 am and 2 pm) to determine treaty eligibility. The prize amount will be reported to the IRS and to the student on form 1042-S.
Department Reporting Responsibilities
For prizes of $600 or more issued to US students and resident alien students, the following documentation must be forwarded to Accounts Payable:
- The student name and address
- A W-9 with the student’s social security number
- Value of the prize
For all prizes issued to non-resident alien students, the following documentation must be forward to Accounts Payable:
Note-If the non-resident alien student is an employee of the University, only the student’s name, address, and prize value is required to be forwarded to Accounts Payable.
- The students name and address
- Value of the prize
- University of Pennsylvania Foreign National Information Form (see Comptroller’s webpage, payroll forms section) http://www.finance.upenn.edu/forms/fniform.pdf
- A copy of the student’s I-94 Card, Visa, Passport and I-20 / DS 2019 or I-797
It is important to inform the recipients of the income tax consequences of their winnings. Even in situations where the University is not required to report winnings, the recipients are responsible for reporting such payments on their individual tax returns.
The University is not in the position to offer specific tax advice. It is recommended that the student consult with a tax professional.
Unrelated Business Income
The University is required to report any income received from activities that are unrelated to its mission. The IRS established these requirements to avoid unfair competition between non‐profit organizations and for‐profit, taxable businesses. The key principle revolves around the source of the revenue, and not how that revenue is spent.
All three elements must be present to determine if an activity is subject to UBIT. The activity must:
- Be conducted as a trade or business, with a profit motive
- Be regularly carried on
- Not be substantially related to the tax exempt mission of the University
- Conduct of a Trade or Business is any activity carried on for the production of income from selling goods or performing services, with the intent of realizing a profit
- Regularly Carried On refers to business activities that exhibit frequency and continuity; are conducted with a frequency and manner comparable to the conduct of similar activity by a for‐profit, taxable business; and are not activities that are sporadic or infrequent.
- Not Substantially Related means that the business activity must not be substantially related to the University’s exempt mission, which includes education, research, and public service. How essential is this activity to accomplishing the University’s mission? Does the activity contribute importantly to accomplish that purpose?
Exceptions – Not Subject to Taxation
- Activity/Service is for the convenience of students, faculty, and staff
- Qualified Sponsorship Payments
- Rent from real property when no additional services are provided – classrooms, theatres and auditoriums, parking lots, and athletic facilities
- Substantially all the work is performed by volunteers
Revenue Subject to Taxation
Career Center services for alumni
Equipment Rentals and Sales to non‐university members
Merchandise Sales and Services to the public, such as, pharmacy items and reprographics
Fee for service arrangements
Police Services – when the services are provided for the benefit and protection of the vendor, and is beyond the normal and necessary protection provided for university property and people
Sponsorship payment – for a payment to constitute a qualified sponsorship payment, there must be no arrangement or expectation that the sponsor will receive any substantial return benefit for its payment, other than the use or acknowledgement of the sponsor’s name or logo
Use of Recreational or Athletic Facilities – income received from public, alumni, and spouse or children of students, faculty, and staff
Use of Athletics Facilities by professional teams
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