Business Gym for Your Employees, and Maybe You Too
It’s no secret that you have many tax advantages when you operate your own business.
For example, setting up a business gym on your business premises or in a separate building can create
- A tax deduction for the business, and
- Tax-free benefits for the employees—and possibly for you too.
But you need to pick the right tax code section along with the right IRS regulations to ensure deductions and tax-free status.
The Winding Road
You would think that lawmakers could give you a clear tax path to a business gym deduction. But instead, you have a winding road before you.
Don’t worry! We’ll create a clear path.
But first, you need to be aware of the two conflicting Internal Revenue Code sections, described below:
IRC Section 132(j)(4). On-premises gyms and other athletic facilities.
In General: Gross income shall not include the value of any on-premises athletic facility provided by an employer to his employees.
On-premises Athletic Facility: For purposes of this paragraph, the term “on-premises athletic facility” means any gym or other athletic facility—
- Which is located on the premises of the employer,
- Which is operated by the employer, and
- Substantially all the use of which is by employees of the employer, their spouses, and their dependent children (within the meaning of subsection (h)).
If this were all you had to read, it would be pretty clear, right?
But as you are about to see, there’s more to it.
IRC Section 274(e)(4). Recreational, etc., expenses for employees.
Expenses for recreational, social, or similar activities (including facilities therefore) primarily for the benefit of employees (other than employees who are highly compensated employees (within the meaning of section 414(q)).
For purposes of this paragraph, an individual owning less than a 10 percent interest in the taxpayer’s trade or business shall not be considered a shareholder or other owner, and for such purposes, an individual shall be treated as owning any interest owned by a member of his family (within the meaning of section 267(c) (4)). This paragraph shall not apply for purposes of subsection (a)(3).
But, there’s a conflict. And there’s a really huge difference between a gym for all employees (perhaps even select employees) or primarily for rank and file.
What to Do
The good news is that the IRS comes to the rescue and gives you clarity. The IRS says:
If the tax treatment of a particular fringe benefit is expressly provided for in another section of Chapter 1 of the Internal Revenue Code of 1986, section 132 and the applicable regulations (except for section 132(e) and the regulations thereunder) do not apply to such fringe benefit.
The fringe-benefit athletic facility that applies to the gym is in IRC Section 132(j)(4), not Section 132(e). This means that IRC Section 274 and its regulations rule the roost on the business gym deduction.
Primary Use
If you are the sole owner and only executive employee of your business, your gym or other recreational facility qualifies as a tax-deductible employee entertainment facility when your employees make use of the facility more than you do. The IRS says that the facility has to primarily benefit your employees generally.
This means that the rank-and-file employee group must use the facility on more days than the owner and the highly compensated groups do. To keep this “more than 50 percent rule” clear in your mind, think of it as the 51-49 rule or test.
To see if you pass the 51-49 test, look only at days of use of the facility.
Example: Rank-and-file employees use the gym 35 days during the year, and you (the business owner) use it for 21 days. The gym passes the 51-49 test; accordingly, it’s deductible to your business as an employee recreational facility, and the users have tax-free use.
Rank and File
The gym exception applies only to expenditures made primarily for the benefit of your employees other than employees who are officers, shareholders, owners with a 10 percent or greater interest in the business, or other highly compensated employees.
For the 10 percent ownership test, the law treats an employee as owning any interest owned by a member of his or her family. The family includes brothers and sisters, spouses, ancestors (such as parents and grandparents), and lineal descendants (such as children and grandchildren).
For the facility exception, the highly compensated group consists of employees who earned more than $150,000 for the preceding year and (if this category is elected by the employer) were in the top 20 percent of the employees when ranked by compensation for the year.
Working Examples with Employees
Family Members: John and Henry are brothers who own 4 percent and 96 percent, respectively, of a company known as JH. They have four rank-and-file employees. During the year, John, Henry, and their spouses and children use the gym 221 times. The rank-and-file employees and their spouses and children use the gym 222 times.
JH may deduct the cost of the gym—providing it can prove member use by the rank and file exceeds the use by the owner group. What proof would work? The gym should have some type of proof, such as a daily sign-in sheet.
Sole Proprietorship: Jimmy, a sole proprietor, has one employee. Jimmy uses the gym 65 times and his employee uses the gym 157 times. Jimmy may deduct the cost of his gym. The employee uses the gym tax-free.
No Employees with the Gym in the Home
David A. Kelly, CPA, worked long hours for public accounting firm Arthur Young and Company and moonlighted as a self-employed accountant for more than 500 hours a year, much of this during the busy tax season. His self-employed practice generated a little over 26 percent of his total income.
To maintain his stamina under such a heavy workload, Kelly maintained memberships in two athletic clubs, and because the clubs were not open at all the times he wanted to use them, Kelly purchased $2,787 worth of exercise equipment for his own use at home.
Personal Health: The court did not deny that the use of the home equipment increased Kelly’s stamina and enabled him to work longer hours. It simply ruled that Kelly’s cost of maintaining good health is one of those expenses so “inherently personal” that it simply does not qualify as a business tax deduction.
Fringe Benefit: Kelly presented an alternative argument to the court, stating that he is entitled to the deduction because, as an “employer” in his own accounting practice, he expended money providing recreational facilities for himself as an “employee.” The court said no deduction and explained to Kelly that because he was self-employed, he was not an employee of himself.
Likely Similar Fate for One-Owner-Employee Corporations
The IRS regulation requires that the recreational facility be primarily for the benefit of rank-and-file employees. With no employees other than the owner, that’s not going to happen.
We were hoping to find a case, ruling, or other support saying that you could have this gym fringe benefit without any employees other than the owner. We searched hard. We found nothing.
Gym in the Home
In Section 132 of athletic facilities regulations, the IRS says that you may not locate your gym in a facility for residential use.
But as we stated at the beginning of this article, the Section 274 regulations rule here because there is a conflict between the 132 and the 274 tax code sections and related IRS regulations. The 132 regulations state that because of this conflict, you should follow the 274 regulations.
Under Section 274 and its regulations, we did not find anything on which you could hang your hat that allowed the gym as an employee benefit if you had the office and the gym in your home.
We can see how this might work with a large home and several employees, but since you don’t have a regulation, court case, or private letter ruling in your favor, we don’t recommend this deduction.
You could, of course, request a private letter ruling.
Gym Membership
The IRS states: “No deduction otherwise allowable under chapter 1 of the Internal Revenue Code shall be allowed for amounts paid or incurred after December 31, 1993, for membership in any club organized for business, pleasure, recreation, or another social purpose.”
Under this regulation, the IRS names country clubs, golf and athletic clubs, airline clubs, and hotel clubs as the types of clubs for which no deduction is allowed. So say goodbye to the gym membership as a business tax deduction.
You might be hoping that the gym works as a medical deduction. It does not, as the IRS explains in its publication on medical expenses.
Takeaways
Lawmakers need to enact a law that prohibits the IRS from writing conflicting regulations. And they should enact a second law that prohibits the lawmakers themselves from writing conflicting laws.
The good news in the rules that apply to the gym is that the IRS gives you clarity as to which rule to follow if you find conflict. In this case, Section 274 and its regulations rule the roost.
Now you know that you need employees to make the gym deductible. Once you have them, the rank-and-file employees and their families must use the gym more than the officers, shareholders, and highly compensated employees and their families do.
When you achieve the primary-purpose result above, your business gets the tax deduction, and you and your employees use the gym tax-free.
This does not work with a commercial membership gym. Dues to such a gym are not deductible—period.
If you have no employees, you don’t qualify for the tax-free fringe gym benefit.
Also, you likely can’t deduct a gym that you locate in your home, even if you have a tax-deductible principal office in your home with a number of employees working there.
As a business owner, you know that there are many tax advantages that come with running your own business. One such benefit is setting up a business gym on your premises or in a separate building, which can create a tax deduction for your business and tax-free benefits for your employees.
Just remember, picking the right tax code section and complying with the right IRS regulations can be tricky. Fortunately, we at Morris + D’Angelo have a knowledgeable team and can guide you through this process to ensure that you make the most of the tax benefits available to your business.
At Morris + D’Angelo, we are passionate about empowering our customers to make the most of their financial assets through smart tax optimization strategies. If you have questions or concerns about the tax benefits of providing a gym or other athletic facility for your business, our expert team is here to help.
Don’t let complex tax laws hold you back – contact us at Morris + D’Angelo to learn how we can support your financial success! This is our Expertise!
Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo
Daniel Morris
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