Exclusions Under Tax Law For – Meals, Scholarships, Compensation For Injury & Damages Received

ARTICLE HIGHLIGHTS – This article covers exclusions for –

• Meals & Lodging received by employees
• Scholarships received
• Compensation for injuries & sickness
• Payments received from Damages

(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 furnished by the employer – Firstly, the employer must actually provide or furnish the meals for the meals to be excluded from the employee’s taxable income.  In case, the employer is simply giving the employee some cash in the form of meal allowance, then such cash is fully included in the employee’s gross income.

(B) On the employer’s premises –  Lets 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 contracts 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 for the convenience of the employer, and not the employee.  One must remember that as per rules if more than 50% of employees receive

meals furnished by their employer on the employer’s premises,  then it said to be for the convenience of the employer. So if the employer is furnishing 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 gross income.

For value of lodging to be excluded from Gross income, employees must fulfill an additional fourth condition in addition to the above 3 conditions – The employee is also required to accept the lodging as a condition of the employment. Here, 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 benefit 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 purposes of room and boarding are included in gross income of the student to whom such scholarship pertains. One must remember that such  an exclusion applies only if the student is not required to perform services in order to gain the scholarship.

For instance, if a student receives $10000 scholarship for Room expenses for staying in the hostel, then such an amount is included in the gross 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 gross income. In such a case, the amount of $10000 actually represent 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 by a driver and received $10000 as a compensation for the injury. Further, lets suppose after getting the injury, the person had to visit the doctor and incurred $1000 in fees. This $1000 was also reimbursed by the driver. In such a case, both the amounts aggregating to $11000 are excluded from Gross income as Compensation received.

Damages received as Compensation for physical personal injury or a physical sickness are excluded from gross income. However, payments received for mental and emotional distress are not excluded unless it is for medical care. One must remember that Punitive damages which are imposed on the injuring party are included in gross income. Amounts received for loss of reputation or goodwill are also included in the gross income of a person.

(4) Payments received for Damages – A person can receive payments for damages incurred in situations like  (A) lost income,

(B) Property destroyed

(C) Personal injury

(D) Loss of personal reputation or goodwill

Let us consider a situation where a person received damages for a 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 receiving was taxable in the first place, the damages received will also be taxable.

Another situation we can consider is a transporter breaches a contract with the company and failed in timely delivery of Raw materials. Because of 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 in damages from the courts. Here, the damages is replacing lost profits on which the company was anyways supposed to pay tax. Hence, such damages received will also be taxable in the hands of the company. Hence, one must test the taxability of the reason/basis for which damages are received to decide whether damages received shall be taxable or not.