With incentives, it sometimes takes an expert to figure out who should write a check to the Internal Revenue Service at tax time. Here are some guidelines:
A true incentive, which rewards an employee for achieving certain goals with a recreational trip, is 100 percent deductible for the company providing the incentive. “The bad news is that the fair-market value of the trip is going to be considered taxable income to the recipient” and must be reported on an IRS 1099 form, says Jonathan T. Howe, senior partner with Chicago law firm Howe & Hutton, and author of a book on the subject.
A “less-pure” incentive that includes meetings is not a tax burden for the recipient, as long as it includes all the elements of a bona fide business conference, Howe says.
If an employee is required to attend an incentive trip and the trip is primarily for business, the employee is not liable for taxes, says James Gossett, a partner with Chicago law firm Arnstein and Lehr and an advisor to the Society of& Travel Executives.
If a spouse accompanies the employee, the cost of the spouse's travel is not deductible unless the spouse is an employee of the sponsor and has responsibilities to perform on the trip. And spouse awards valued at more than $600 must be reported on a 1099 form.
Some merchandise rewards are subject to certain dollar limits, but safety and other merit awards aren't taxable. Incentives that exceed those limits are taxable.
The IRS Web site — www.irs.ustreas.gov — includes more complete information and a library of articles on incentives in its business tax library. Gossett recommends Publications 463 and 535. And Howe expects a new edition of his book, Taxes and Incentives, later this year.