J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

3.18 Discounts on Company Products or Services

The value of discounts on company products is a tax-free benefit if the discount does not exceed the employer’s gross profit percentage. For example, if a company’s profit percentage is 40%, the maximum tax-free employee discount for merchandise is 40% of the regular selling price. If you received a 50% discount, then 10% of the price charged customers would be taxable income. The employer has a choice of methods for figuring profit percentage.

Discounts on services that are not tax free under 3.17 for no-additional-cost services qualify for an exclusion, limited to 20% of the selling price charged customers. Discounts above 20% are taxable. An insurance policy is treated as a service. Thus, insurance company employees are not taxed on a discount of up to 20% of the policy’s price.

Some company products do not qualify for the exclusion. Discounts on real estate and investment property such as securities, commodities, currency, or bullion are taxable. Interest-free or low-interest loans given by banks or other financial institutions to employees are not excludable. Such loans are subject to tax under the rules discussed at 4.31.

For highly compensated employees, the exclusions for discounts on company products and services are subject to the nondiscrimination rules discussed in the Caution at 3.17