While there are always risks involved in owning a business, there are some pretty great perks too! For instance, if you add a business gym onto your business premises or a separate building, you create a tax deduction for your business and tax-free benefits for your employees.
If you are the sole owner and only executive employee of your business, your gym or other recreational facility qualifies as a tax-deductible employee entertainment facility when your employees make use of the facility more than you do. This means that the rank-and-file employee group must use the facility on more days than the owner and the highly compensated groups do. To keep this “more than 50 percent rule” clear in your mind, think of it as the 51-49 rule or test.
To see if you pass the 51-49 test, do not include days the facility sat unused.
Example Rank-and-file employees use the gym on 35 days during the year, and you (the business owner) use it on 21 days. The gym passes the 51-49 test; accordingly, it’s deductible to your business as an employee recreational facility, and the users have tax-free use.
Rank-and-file employees are those who are not officers, shareholders, owners with a 10 percent or greater interest in the business, or other highly compensated employees.
For the 10 percent ownership test, the law treats an employee as owning any interest owned by a member of his or her family.
Family includes brothers and sisters, spouses, ancestors (such as parents and grandparents), and lineal descendants (such as children and grandchildren). Highly compensated employees are those who earned more than $150,000 for the preceding year and (if this category is elected by the employer) were in the top 20 percent of the employees when ranked by compensation for the year.
Working Examples with Employees
Family members John and Henry are brothers who own 4 percent and 96 percent, respectively, of a company known as JH. They have four rank-and-file employees. During the year, John, Henry, and their spouses and children use the gym 221 times. The rank-and-file employees and their spouses and children use the gym 222 times.
JH may deduct the cost of the gym—providing it can prove member use by the rank and file exceeds use by the owner group. What proof would work? The gym should have some type of log, such as a daily sign-in sheet.
Sole proprietorship Jimmy, a sole proprietor, has one employee. Jimmy uses the gym 65 times and his employee uses the gym 157 times. Jimmy may deduct the cost of his gym.
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