If you are a business owner and want to offer additional employee benefits, you might be thinking about benefits related to health, wellness or fitness. Such benefits may help recruit and retain employees. The IRS usually considers the cost of self-care to be personal, non-business related and therefore not allowed as a business deduction. However, there are exceptions.
The IRS allows businesses to offer fringe benefits to employees and deduct the cost. Before you get too excited, there is a catch. The cost of many fringe benefits are taxed to the employee as income, the same as if you paid the employee a higher salary instead. Certain fringe benefits, however, are not taxed to the employee while the business still gets to deduct the expense.
Thus, there are two factors to consider: 1) can I deduct the cost of this employee benefit and 2) will my employee need to be taxed on the value of the benefit. Let's explore how this works for on-premises athletic facilities versus gym memberships.
IRS Publication 15-B is a guide to tax deductible employee fringe benefits. The IRS states, "Any fringe benefit you provide is taxable and must be included in the recipient's pay unless the law specifically excludes it." (IRS pub 15-B page 3)
The specific fringe benefits that can be deducted by the business and are also not taxed to the employee are: accident and health benefits, achievement awards, adoption assistance, athletic facilities, de minimis (minimal) benefits, dependent care assistance, educational assistance, employee discounts, employee stock options, employer-provided cell phones, group-term life insurance coverage, health savings accounts (HSAs), lodging on your business premises and meals.
On-premises athletic facilities
The IRS allows an employer to provide fitness facilities that are for the benefit of employees, their spouses and dependent children. Employees under this rule are:
The facility must be substantially used by employees, their spouses and dependent children. The facility cannot be open to the general public, nor can the general public pay for memberships or rent the space.
Location and operation
The on-premises athletic facility must be located in a space that is owned or leased by the business and must be operated by the business. It does not have to be at your main location, you can rent or purchase space away from the main office for this purpose. It cannot be in a residential home of the owner and cannot be primarily for residential use such as in a resort.
If you meet these rules, you can provide your employees, spouses and dependent children with athletic facilities to use, you may deduct the cost as a business expense and exclude the cost from your employees pay. Two additional considerations are insurance coverage and when the owner is the only employee.
If you add athletic equipment to your office, consult with your general liability insurance carrier. They may need to modify your policy to cover injuries that could occur in that space.
There is nothing in the the Internal Revenue Code (IRC) Section 132 or IRS Publication 15-B specifically stating that a single owner-employee, such as a single owner of an S-Corporation, cannot have a on-premises gym solely to benefit themselves. However, be aware that other areas of the tax code require that employee benefits need to be for regular employees more than officers and owners. There is no tax court case to specifically to say a single owner-employee of an S-Corp or C-Corp can't deduct this expense, but before creating this fringe for yourself as the owner, consult your tax professional.
The IRS and the tax court routinely deny business related deductions for gym memberships. The basis for this is that health and fitness are important for all people and is therefore a personal expense with a personal benefit. The following tax court rulings show how the tax court views gym memberships.
Battle v. Commissioner
A firefighter claimed that fitness was required for his job and that "my body is my tool." The tax court answered "It is desirable to be physically fit regardless of one’s profession. Petitioner has not offered any evidence to show that his gym expenses were different from or were in excess of what he would have spent for personal reasons."
Kelly v. Commissioner
A self-employed accountant purchased home gym equipment to maintain his stamina during the busy tax season. The tax court denied the deduction, stating "Yet, he was also personally benefitted by maintaining better health. Because the cost of maintaining good health is one of those expenses which is so 'inherently personal' that it simply cannot qualify as a business expense within section 162, such cost is not deductible." The court also found that as a sole proprietor, the accountant was not an employee and cannot provide himself with a fringe benefit related to exercise facilities.
Colbert v. Commissioner
A taxpayer who provided security services to celebrities deducted an $875 annual gym membership, testifying "that he needed to look good...in order to impress his celebrity clients." The tax court denied the deduction as a personal expense.
Hamper v. Commissioner
The tax court agreed a TV anchor could have deducted the cost of self-defense classes because it was needed to be able to defend herself as a media personality from potential stalkers. However, she didn't prove actually took the classes and so the tax court denied her deduction for her gym membership since a gym membership is a personal expense. Had she proven she took the classes, she could have deducted the cost of the specific self-defense classes.
Personal medical deduction
You may be thinking, if I cannot deduct a gym membership as a business expense, what about as a personal medical expense? After all, being health is important for medical reasons. A gym membership will usually not qualify for a personal medical deduction as it is good for all of us, healthy and sick, to be physically fit.
To be a personal medical deduction, the cost needs to be more than what a taxpayer would spend to be healthy and fit. Even if recommended by a doctor to get exercise, there has to be a specific medical or treatment reason to justify deducting the cost. According to the tax court in Humphrey v. Commissioner, "To deduct gym membership as a medical expense, a taxpayer must show the expenses were in excess of or different from what he would normally spend for personal purposes."
If one was to be able to take a medical deduction, it would likely be under a doctors orders to treat a specific medical issue and the deductible cost would be the additional services over and above the standard gym membership. IRS Publication 502, Medical and Dental Expenses, states on page 14:
"You can include in medical expenses amounts you pay to lose weight if it is a treatment for a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease). This includes fees you pay for membership in a weight reduction group as well as fees for attendance at periodic meetings. You can't include membership dues in a gym, health club, or spa as medical expenses, but you can include separate fees charged there for weight loss activities."
Personal medical deductions are subject to limits in a way business deductions are not, such as needing to itemize deductions and only deducting amounts greater than 7.5% of adjusted gross income (AGI).
If you have employees and are looking to provide fitness equipment as an additional benefit, you may be able to do so. The fitness equipment will need to be located in space owned or leased by the business and substantially used by employees, their spouses and dependent children. Gym memberships are never deductible as a business expense and usually not allowed as a personal medical deduction, though some additional costs incurred at a gym may qualify.
Questions: email [email protected]
Jennie Schottmiller, LMFT, CPA is a licensed marriage and family therapist who practiced as a CPA prior to becoming a therapist. She has an active solo therapy practice and offers courses to help small business owners with accounting, tax and financial analysis matters.
Disclaimer: This blog is for education only. Please consult with a qualified professional when you have any questions about your personal accounting, tax or legal situation. Information contained in this post is for informational purposes only and not intended to replace professional advice.