ARTICLE HIGHLIGHTS – This article covers exclusions for –
(1) Meals & Lodging received by employees – The value of meals received by employees and their spouses/ dependants are excluded if all 3 conditions are satisfied :
(A) The meals and/or lodging are provided by the employer – Firstly, the employer must actually provide or furnish the meals for the meals to be eliminated from the employee’s taxable income. In case, the employer is simply providing the employee some amount in the form of meal allowance, then such amount is fully included in the employee’s gross income.
(B) On the employer’s premises – Let’s suppose the employer has a cafeteria where employees go and have meals. So if the cafeteria is in the employer’s building or around the employer’s campus/complex, then the meal is considered provided on the employer’s premises. In a case, the employer makes a contract with a restaurant in town and agrees to prepay the bills of the restaurant, and now the employees go to the restaurant to eat, then the value of the meals are included in the employee’s gross income.
(C) For the convenience of the employer – The meals must be furnished or provided for the convenience of the employer, and not the employee. One must remember that if more than 50% of employees receive meals provided by their employer on the employer’s premises as per rules, then it is said to be for the convenience of the employer. So if the employer is providing meals to its employees and 75% of the employees take benefit of that, then the employees who avail of such benefit can exclude the value of the meals from their total income.
For the value of lodging to be excluded from the total income, employees must fulfill an extra condition in addition to the above 3 conditions – The employee is also required to accept the lodging as a condition of the employment. According to this condition, the employee must live on the employer’s premises if the employee wants to work for the employer.
(2) Scholarships & Fellowships received – Scholarships and Fellowships are amounts paid to students or to educational institutions for the sake of such students to aid in their educational degree. Scholarships are non-taxable to the extent that scholarship pays for tuition and related expenses such as books, fees, supplies related to the course. Amounts received as scholarships for the purpose of room and boarding are included in gross income of the student to whom such scholarship pertains. One must be sure that such an exclusion applies only if the student is not required to perform services in order to gain the scholarship.
For example, if a student receives a $10000 scholarship for room expenses for staying in the hostel, then such an amount is included in the total income of the student. Further, in case the student who is receiving $10000 has to work at the College Research Centre in order to obtain the funds, then this amount is again included in his total income. In such a case, the amount $10000 actually represents wages & not scholarships.
Also, waivers in tuition fees or reductions in the cost of tuition are excluded from Gross income of the students.
(3) Compensation received for Injury & Sickness – Let us suppose a person walking on the street got injured in a car accident and received $10000 as compensation for the injury. Further, let’s suppose after getting the injury, the person had to visit the doctor and incurred $1000 in fees. This $1000 was also compensated by the driver. In such a case, both the amounts aggregating to $11000 are excluded from total income as compensation received.
Damages received as compensation for physical personal injury or a physical sickness are excluded from total income. However, payments received for mental and emotional suffering are not excluded unless it is for medical care. One must recall that punitive damages which are imposed on the injuring party are included in total income. Amounts received for loss of reputation or goodwill are also included in the total income of a person.
(4) Payments received for Damages – A person can receive payments for damages incurred in situations like
Let us consider a situation where a person received damages for an unlawful job termination. In such a case, the loss of income is generally taxed in the same way as the income it is compensating, As the wages which the taxpayer received was taxable in the first place, the damages that are received will also be taxable.
Another situation we can consider is a transporter breaches a contract with the company and fails in timely delivery of Raw materials. Due to the lack of availability of raw materials, the company could not produce finished goods which resulted in loss of profits. The company sued the transporter for loss of profits and received $100000 for damages from the courts. Here, the damages are replacing lost profits on which the company was supposed to pay tax anyways. Thus, such damages received will also be taxable in the hands of the company. Therefore, one must test the taxability of the reason/basis for which damages are received to decide whether damages received shall be taxable or not.
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