Tax Advantages

Did you know that your structured service award program has tax benefits and may be completely tax deductible?

The 1987 tax law

The Tax Law enacted in 1987 eliminates many tax preferences, but it creates a new one that gives companies a significant incentive to establish length-of-service and safety campaigns. Gift certificates, cash, gift cards and points programs are completely taxable and not included.

AS OF JAN. 1, 1988, EMPLOYEES DO NOT HAVE TO DECLARE AWARDS RECEIVED FOR LENGTH-OF-SERVICE AND SAFETY ACHIEVEMENT, AND COMPANIES CAN DEDUCT AWARD COSTS AS LONG AS THE TOP AWARD IS LESS THAN $1,600.00 AND THE AVERAGE IS $400.00 OR LESS PER EMPLOYEE.

To take advantage of this special tax benefit, the company must establish that the awards are "part of an established written plan or program...which does not discriminate in favor of highly compensated employees", according to the report that accompanied the conference committee bill.

Present law lets companies deduct the costs of qualified plans for length-of-service, safety and productivity awards but makes no reference to the recipient's tax position. The new law specifically excludes qualified awards from employees' compensation but no longer lists productivity campaigns among the qualifying programs.

To qualify, awards must be "transferred by an employer to an employee for length-of-service achievement, awarded as part of a meaningful presentation, and awarded under conditions and circumstances that do not create a significant likelihood of disguised compensation."

limits award use

The conference committee further specified that length-of-service awards do not qualify if awarded before an employee has at least five years of service or if an employee receives more than one award every five years. An exception is an award of "nominal" value such as a "pin or similar item with a value of $15.00 awarded to an employee on joining a business, on completing six months employment, or on completing a probationary period and a traditional retirement gift presented to an employee on his or her retirement...". The Internal Revenue Service in the past has accepted a slightly broader definition of "nominal" awards than that implied by the $15.00 limitation, according to Monique Yingling, partner in the Washington based law firm of Zuckert, Scoutt, Rasenberger and Johnson.