Line of Business Limitations

Line of business limitations are a federal income tax rule that affects fringe benefits employers provide to employees. If a company operates in multiple lines of business, an employee who receives a fringe benefit from a line in which they do not work generally must include the value of that benefit in taxable income.

How it works

• The rule treats fringe benefits provided from a different business line as taxable income to the employee.
• Example: If an employee works at a movie theater but the company also owns an amusement park, a free or discounted amusement park admission would generally be taxable. A free movie at the theater where the employee works would typically not be taxable under the line of business limitations because it comes from the employee’s own business line.

When the rule applies

• An employer’s lines of business are defined by the Enterprise Standard Industrial Classification (ESIC) Manual published by the U.S. Office of Management and Budget.
• A company is considered to have more than one line of business if it offers products or services for sale to customers in more than one two‑digit ESIC classification.
• Products or services sold primarily to employees (rather than the general public) are not treated as employee discounts for the purpose of line of business limitations.

Exemptions and aggregation

Certain situations allow separate lines to be treated as a single line for determining whether benefits are taxable:

• Aggregation is required when:
• It is unusual in the employer’s industry for one line of business to be operated separately from the others; or

• A substantial number of employees perform substantial services for more than one line, making it impractical to assign employees to a single line.
  When aggregation applies, fringe benefits from any of the aggregated lines may be tax‑free to employees who work in any of those lines.

• Reciprocal agreements:

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• Two employers who operate in the same line of business can enter written reciprocal agreements to provide tax‑free benefits to each other’s employees.
• Requirements: the agreement must be written and must not cause substantial additional cost to either employer.
• The reciprocal agreement rule applies only to benefits provided at no additional cost and does not cover qualified employee discounts.

Practical takeaways

• Employers should determine their ESIC classifications and whether multiple lines exist.
• Consider aggregation rules if business lines are closely integrated or employees work across lines.
• Use written reciprocal agreements when sharing benefits with other employers in the same business line.
• When in doubt, consult IRS Publication 15‑B or a tax advisor to confirm whether a particular fringe benefit is taxable under the line of business limitations.

Sources: IRS Publication 15‑B: Employer’s Tax Guide to Fringe Benefits; Electronic Code of Federal Regulations — Items Specifically Excluded From Gross Income.