Monday, December 13, 2010

"There's no such thing as a free bike."



Ikea gave all its employees a "free" bike yesterday.

Those "gift" bikes could turn out to be very expensive, because the IRS does not treat it as a "gift" but as a "taxable fringe benefit."

It raises interesting tax questions.

1) If the Ikea employee uses the bike to commute to work, maybe some would contend that it could qualify for an exclusion from income of $20 per bike commuting month, but the IRS Publication 15-B Employer's Tax Guide to Fringe Benefits just talks about excluding reimbursement for employee bike expenses, and says nothing whatsoever about the employer providing a bike to the employee. And Ikea did not make the provision of the bike contingent on its use for commuting. It doesn't sound like Ikea set up the bike program to qualify for that exclusion.

2) Assuming no exclusion applies, the tax cost of this gift (payroll taxes of 15.3% plus federal and state income marginal rates, which could easily total over 50% for low-income families on the phase-out portion of the Earned Income Tax Credit) makes it a pretty expensive bike for many employees who either (A) don't particularly care all that much for biking or (B) like biking but already have a bike they like better than the one Ikea is giving them.

3) If you win a bike you don't care to keep on a game show or contest, I believe you can just sell the bike immediately for its fair market value (FMV) in an arm's length transaction and just pay taxes on the proceeds of the sale as your income for tax purposes. So, even if the list price of the bike is $400, you only need to pay tax on the fair market value of the bike that you actually realized rather than the list price. (Thanks to Jack Bogdanski of Lewis & Clark Law School for making me clarify the language here.)

4) By contrast to the game show contestant, if an Ikea employee sells their bike immediately, I suspect they are going to have a difficult time getting their tax liability reduced to the FMV realized in the transaction, due to the fact that it's subject to payroll taxation as well as income taxation, reported on a W-2 rather than a 1099, etc.

Bottom line: some (many?) Ikea employees may wind up paying more in tax than this bike is worth to them.

7 comments:

  1. I wouldn't have thought to have put the bike on my return -- but I'm assuming IKEA would.

    From my employer they would not have put it on if it was less than 599 if memory serves. (extra's from employer to employee...)

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  2. There is no $600 threshold for reporting employee benefits on a W-2, Chris.

    There is a $600 threshold for reporting income to independent contractors and other kinds of miscellaneous non-employment income on a 1099.

    However, even if the payor does not bother to report the income on a W-2 or 1099, it is still taxable income.

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  3. However, if the bike turns out to be REALLY cheap (like say the cost of a holiday turkey), it's possible Ikea will want to argue that it should be treated as a de minimis fringe benefit.

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  4. Could Ikea "rent-to-own" the bike to the employee and deduct $20/month until the bike is paid off if the employee uses it for commuting?

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  5. Anonymous, this is definitely outside the scope of my VITA certification, but my opinion is that--if Ikea had wanted to do that, it could have hired a tax professional to structure something along the lines you suggest in a manner that might fall within the tax free bicycle reimbursement provisions described in IRS Pub 15B.

    But they don't appear to have done so.

    It will be interesting to see what Ikea co-workers (http://www.ico-worker.com/) say once they get their paychecks.

    If Ikea is trying to say that the bikes are equivalent to the proverbial taxfree turkey, then employees won't see any extra withholding for the bikes.

    However, if Ikea is reporting the bikes as taxable income, presumably their paychecks will be smaller to reflect the increased withholding on the value of the bike.

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  6. Does a fringe benefit have to rise above a minimum value before it's taxable? I only ask because I suspect these bikes are worth less than $90 MSRP (and possibly as low as just over half that.)

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  7. It's a 75 dollar at best retail bike. Do you report all your christmas gifts to the IRS? It's akin to getting an mp3 player or something like that. While I feel this free bike certainly isn't free as it is a POS that will likely cost in repairs and upgrades to ride the thing, or possible high ER bills from riding such a piece of junk. I don't think the IRS is going to hunt down Ikea employees and force them to report their "free" POS bike.

    Also income tax on wages is actually no Lawful according to the constitution of these here united states in the first place. That being said most employees of IKEA earn min wage. I don't think too many will be filling out the long form if any form at all.

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