Benefits by the book

I heard that a veterinarian was audited and fined more than $30,000 in back taxes for not claiming discounted pet care as taxable income on his employees' paychecks. I've been offering $300 in pet care per year per full-time employee (and half that for part-timers). If an employee goes over the $300 limit, he or she gets a 50 percent discount on additional care. Have I been doing it wrong all these years?

Gary Glassman

"Yes, you've been doing it wrong. First, the rules on discounts for products are regulated differently from services," says Veterinary Economics Editorial Advisory Board member Gary Glassman, CPA, a veterinary financial consultant and partner with Burzenski and Co. PC in East Haven, Conn. The Internal Revenue Service (IRS) says the discount on products and lab tests can't be greater than the normal selling price multiplied by the employer's gross profit, which is determined by subtracting the cost of the product and the costs of shipping and carrying the product from the sales price. "A good rule of thumb is to have employees pay cost plus 10 percent for products," Glassman says.

You can, however, offer tax-free services when you're not booked full, Glassman says. He bases this on IRS code section 132(b). "Where excess capacity exists, no income is imputed to the employee," he says. "It's only when a practice is at full capacity that IRS code section 132(c) applies, which states that discounted services can't exceed 20 percent." For example, if you have open appointment slots or available cage spaces, your employees can take advantage of them tax-free. Otherwise, it's a 20 percent discount. If you offer employees a set dollar amount of free services, Glassman says the credit can only be used for services, not product purchases.