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Employers Can Get a Tax Benefit for Providing Gym Access

Although this tax break has been on the books for decades, several special rules may come into play.

Is your company requiring more employees to return to the business premises? They may be reluctant to do so, but you can offer some new accommodations that might make things more worthwhile. For example, your company may provide a gym or similar athletic facility on the premises so employees can work out before or after work hours (or maybe even during lunch)

There are several potential benefits such as creating goodwill and improving morale—not to mention fostering better health among workers—plus this idea can provide a big two-way tax pay-off. If certain requirements are met, the value of an on-site athletic facility is tax-free to participating employees, while your company can generally deduct the associated costs.

Although this tax break has been on the books for decades, several special rules may come into play.

For starters, the value of fringe benefits generally constitutes taxable income to employees, except in situations where a specific tax code provision exempts the benefit from tax. The exemption for employer-provided athletic facilities applies to eligible employees as well as their spouses and dependent children. For example, if the teenaged child of a business owner works out at the company gym, the value of the use is tax-free.

From the company’s perspective, you can write off the cost of renovations and administrative costs, as well as other related expenses like insurance and maintenance fees or the cost of personal trainers.

Note that the definition of an  “employee” may extend further than you think. For these purposes, it includes the following:

  • Current employees;
  • Ex-employees who have retired or left the job due to disability;
  • The widow or widower of an employee who died or retired due to a disability; and
  • Partners performing services in a partnership;
  • Certain leased employees.

Key point: The facility must be “substantially used” by employees, their spouses and dependent children. In other words, the facility can’t be available to the general public or outsiders who pay to belong.

Furthermore, the facility must be located in a physical space that is operated by and owned or leased by the business. That doesn’t mean it has to be part of your main office (although that’s frequently the case). For example, the company may rent a storage facility or annex nearby that you can turn into a workout room and still qualify. But you’re not allowed to set up a gym in your personal residence or rent a space or pool at a hotel.

Finally, you can’t deny access to eligible employees who want to participate. Use of the facility can’t be limited to just the top brass.

What happens if your company offers gym memberships to employees instead of building an on-site facility? That also promotes better health and strengthens the connection with employees, but the value is taxable to participants as compensation. Bottom line: If this concept makes sense for your company, figure out the approach that works out best.