Line of Business Limitations

What Are Line of Business Limitations?

Line of business limitations is a federal income tax rule applied to fringe benefits that employers provide their employees. It states that if a company is engaged in multiple lines of business and an employee receives a fringe benefit from a line of the company's business that she does not work in, she must pay taxes on that benefit.

Understanding Line of Business Limitations

As one example of line of business limitations, if an individual works for a movie theater and her company also owns an amusement park, if she received free or discounted admission to the amusement park, she would be required to pay taxes on the value of the free ticket or the discount because the Internal Revenue Service (IRS) would consider this benefit to be income. However, if she saw a movie for free at the theater where she worked, she would generally not have to pay tax on the amount of the free movie ticket because it would not be subject to line of business limitations.

Products or services sold primarily to employees rather than to the general public are not considered employee discounts and thus do not fall under the line of business limitations rules.

An employer’s line of business is defined in the Enterprise Standard Industrial Classification (ESIC) Manual, which is published by the U.S. Office of Management and Budget. An employer is considered to have more than one line of business if it offers products or services for sale to customers in more than one two-digit ESIC classification.

Exemptions from Line of Business Limitations

In some circumstances, business lines may be aggregated into one in determining the eligibility of benefits under the line of business limitations. Aggregation is required when it is unusual in the employer’s industry for one line of business to be operated separately from the others. It is also required when a substantial number of employees perform substantial services for more than one line of a company’s business, making it difficult to assign employees to specific lines of business. In these cases, an employee will not incur taxes for fringe benefits provided by their employer.

Reciprocal agreements among two employers that operate in the same line of business also exempt employees who receive tax-free benefits from the other employer from the line of business limitations rules. To qualify, these must be written reciprocal agreements and must not cause either employer to incur substantial additional cost. The reciprocal agreement rule only applies to benefits provided at no additional cost but does not cover qualified employee discounts.

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  1. Internal Revenue Service. "Publication 15-B: Employer's Tax Guide to Fringe Benefits," Pages 3, 11. Accessed Dec. 16, 2020.

  2. Internal Revenue Service. "Publication 15-B: Employer's Tax Guide to Fringe Benefits," Page 11. Accessed Dec. 16, 2020.

  3. Electronic Code of Federal Regulations. "Items Specifically Excluded From Gross Income." Accessed Dec. 16, 2020.

  4. Internal Revenue Service. "Publication 15-B: Employer's Tax Guide to Fringe Benefits," Page 19. Accessed Dec. 16, 2020.

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