Limitations in Line of Business: What Are They?
A federal income tax provision known as the “line of business limitations” is applied to fringe benefits that firms offer to their staff. It stipulates that an employee must pay taxes on any fringe benefits she receives from a business line she does not work in if the company has many lines of business.
Recognizing Business Line Limitations
For example, suppose a person works for a movie theater chain, and her company also owns an amusement park, and she gets free or discounted admission to the park. In that case, she will have to pay taxes on the discount or free ticket amount because the Internal Revenue Service (IRS) will view this as income. This is an example of a line of business limitation. On the other hand, since the free movie ticket would not be subject to line of business limitations, she would usually not be required to pay tax on the amount if she viewed it at the theater where she worked.
Employee discounts do not apply to goods or services sold primarily to workers rather than the general public and are therefore exempt from the business limitations laws.
The U.S. Office of Management and Budget publishes the Enterprise Standard Industrial Classification (ESIC) Manual, which defines an employer’s business line. If an employer sells goods or services to clients in more than one two-digit ESIC classification, it is said to have multiple lines of business.
Exclusivity from the Line of Business Restrictions
In certain situations, benefit eligibility under business limitations may be based on combining business lines into one. Aggregation is necessary when one line of business is run differently from the rest in the employer’s industry. It is also necessary when many workers provide essential services for multiple business lines within an organization, making it challenging to designate workers to specific business units. An employee’s employer-provided fringe benefits are not subject to taxation in these situations.
Employees who get tax-free benefits from the other firm are also exempt from the line of business limitations laws under reciprocal agreements between two employers in the same industry. These have to be formal, reciprocal agreements to be eligible, and neither company has to bear a significant financial burden from them. The reciprocal agreement rule does not cover employee discounts that meet specific requirements; instead, it only applies to benefits given without charge.
