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Discount Programs May Be Taxable


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Discount Programs

Discount programs, such as the employee discount at a retailer, coffee shop, or even car dealership are common in many businesses and have been around for several years. But many employees and employers may not realize that these are actually tax-advantaged programs, described in IRC Section 132(a). Recent guidance on "Friends and Family" discounts could take discount programs to a whole new level---a taxable level, that is. Here's a review of how non-taxable discounts may be provided.

The employer must determine:

  • The percentage used to determine a qualified employee discount;
  • The employees who may receive non-taxable discounts; and
  • The price of the property or service being discounted.

The IRS Office of Chief Counsel released Memorandum 20171202F on March 24, 2017, that walks through the process of determining whether an employer's "friends and family" discounts are taxable or non-taxable. It outlines and discusses qualified employee discounts as it relates to services.

Percentage of Discount

IRC Section 132(c)(1) defines a qualified employee discount for services as 20 percent of the price at which the services are being offered by the employer to customers. The services for which the discount applies must be one provided by the employer to customers in the ordinary course of its business.

In the case of property being sold by the employer, a qualified employee discount for property is the gross profit percentage of the price at which the property is being offered by the employer to customers.

Employees eligible for non-taxable discount

The employee discount rules broadly define the term of "employee" to include an individual currently employed by the employer, an individual who retired from the employer, or became disabled while working for the employer, or a widow or widower of any one of these. Spouses and dependent children of the above mentioned groups are also treated as "employees" for purposes of qualifying for a nontaxable benefit.

Price of the discounted service or property

An established price for services is required in order to determine if the percentage of the employee discounts exceed 20 percent. The price can be determined in one of two ways.

  • The price at which the service is being offered to customers at the time of the employee's purchase establishes the basis for determining the percentage of the discount. For instance, a published price such as prices found in current ads or flyers. If a quantity discount applies to customer pricing, then employees' purchases must contain the designated quantity.
  • If the employer offers a discounted price to a discrete customer or to consumer groups, and all the sales at that discounted price comprise at least 35 percent of the employer's gross sales for a representative period, the discounted price may be used. A "representative period" is the taxable year of the employer immediately preceding the taxable year in which the service is provided to employees at a discount.


Memorandum 20171202F did not make the employer's name public, but indicated the employer was in the rental business. The employer allowed employees to sign up individuals, including themselves, to receive a discount off published rates for services. These individuals could be spouses or domestic partners, family members, and friends. After signing up at no cost to become a "member," they receive a point for every dollar spent that is then applied to receive discounts on future services. This is the identical process used by the general public.

In addition to the point discounts, employees and their designees receive a percent discount off the published rates. Though the discount rates were not part of the facts for this memorandum, employees may even find discounts greater than the percent on the open market. Other facts concerning discounts and pricing to large customers were not properly supported from this employer for the IRS to evaluate total sales with discounted pricing.


Only individuals meeting the definition of employee under IRC Section 132(h) and Treasury Regulation Section 1.132-1(b)(1) qualify for a nontaxable fringe benefit of a qualified employee discount. While the employees may designate others, such as friends, for the discounts, the employer must collect and pay to the IRS, taxes based on the value of discounts given to such individuals from the employee who designated such "nonemployees".

In addition, the term "qualified employee discount" means any discount that does not exceed 20 percent of the price at which services are being offered by the employer to its customers. If the qualified employee discount on services exceeds 20 percent of the price offered to customers, the excess discount is also includable in the employee's income.