Determination of Line of Business for Purposes of No-Additional-Cost Service and Qualified Employee Discount Fringe Benefits

DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[REG-132805-17]</DEPDOC> <RIN>RIN 1545-BP09</RIN> <SUBJECT>Determination of Line of Business for Purposes of No-Additional-Cost Service and Qualified Employee Discount Fringe Benefits</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Notice of proposed rulemaking. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains proposed regulations that would provide guidance regarding an employer's line or lines of business for purposes of determining the exclusion from gross income for no-additional-cost services or qualified employee discounts provided to employees. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Written or electronic comments and requests for a public hearing must be received by November 4, 2025. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> Commenters are strongly encouraged to submit public comments electronically via Federal eRulemaking Portal at <E T="03">https://www.regulations.gov</E> (indicate IRS and REG-132805-17) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comments submitted to the IRS's public docket. Send paper submissions to: CC:PA:01:PR (REG-132805-17), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning the proposed regulations, Andrew Holubeck at (202) 317-4774; concerning submissions of comments and/or requests for a public hearing, Publications and Regulations Section at (202) 317-6901 (not toll-free numbers) or by email to <E T="03">publichearings@irs.gov</E> (preferred). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This notice of proposed rulemaking contains proposed regulations that would amend the Income Tax Regulations (26 CFR part 1) under section 132(a) of the Internal Revenue Code (Code) related to no-additional-cost services and qualified employee discounts. The proposed regulations are issued under the authority conferred by Section 132(o), which provides the Secretary or his delegate (Secretary) with an express grant of regulatory authority to prescribe such regulations as may be necessary or appropriate to carry out the purposes of section 132. The proposed regulations are also issued under the authority of section 7805(a) of the Code, which authorizes the Secretary to prescribe all needful rules and regulations for the enforcement of the Code. These proposed regulations would replace a business classification system that has not been updated since 1974 with a much more current classification system that is updated every five years. Under these proposed regulations, the application of the no-additional-cost benefit and employee discount exclusions from employee income under section 132(a)(1) and (2) would be determined under a classification system that more accurately reflects current economic activity than the system used under the existing regulations, thereby reducing burden in applying the exclusions from income under section 132(a)(1) and (2). <HD SOURCE="HD1">Background</HD> Section 132(a)(1) and (2) exclude from the gross income of an individual any fringe benefit that qualifies as a no-additional-cost service or a qualified employee discount, respectively. Section 132(b) defines the term “no-additional-cost service,” in part, as any service provided by an employer to an employee for use by such employee if such service is offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services. Section 132(c)(1) defines the term “qualified employee discount,” in part, as any employee discount with respect to qualified property or services. Section 132(c)(4) defines the term “qualified property or services” as any property (other than real property and other than personal property of a kind held for investment) or services that are offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services. Section 1.132-4(a)(1) provides that, for purposes of determining whether the exclusion under section 132(a)(1) or (2) applies, an individual to whom or on behalf of whom the fringe benefit is provided must have performed substantial services in the employer's line of business that offers such services or property for sale to customers in the ordinary course of business. Section 1.132-4(a)(2)(i) states that an employer's line of business is determined by reference to the Enterprise Standard Industrial Classification Manual (ESIC Manual) prepared by the Statistical Policy Division of the U.S. Office of Management and Budget (OMB) and further provides that an employer is considered to have more than one line of business if the employer offers for sale to customers property or services in more than one two-digit code classification referred to in the ESIC Manual. Section 1.132-4(a)(2)(ii) lists as examples of two-digit classifications under the ESIC Manual general retail merchandise stores; hotels and other lodging places; auto repair, services, and garages; and food stores. Section 1.132-4(a)(3) provides that, if pursuant to § 1.132-4(a)(2), an employer has more than a single line of business, such lines of business will be treated as a single line of business where and to the extent that one or more of the following aggregation rules apply: (i) If it is uncommon in the industry of the employer for any of the separate lines of business of the employer to be operated without the others, the separate lines of business are treated as one line of business. (ii) If it is common for a substantial number of employees (other than those employees who work at the headquarters or main office of the employer) to perform substantial services for more than one line of business of the employer, so that determination of which employees perform substantial services for which line of business would be difficult, then the separate lines of business of the employer in which such employees perform substantial services are treated as one line of business. (iii) If the retail operations of an employer that are located on the same premises are in separate lines of business but would be considered to be within one line of business under § 1.132-4(a)(2) if the merchandise offered for sale in such lines of business were offered for sale at a department store, then the operations are treated as one line of business. Section 132 (including section 132(a)(1) and (2)), was added to the Code as part of the Deficit Reduction Act of 1984, Public Law 98-369, 98 Stat. 494. Concerning the line of business limitation that applies to the no-additional-cost service and qualified employee discount exclusions in section 132(a), the House Report on this legislation noted that “[i]n providing guidance as to the treatment of an employer as consisting of separate lines of business for this purpose, Treasury regulations . . . may refer to the Standard Industrial Classifications used for other governmental purposes.” H. Rept. 98-432, 1594, 1984 U.S.C.C.A.N. 697, 1218. First used in 1938, the Standard Industrial Classification (SIC) is an industry classification system developed by OMB for use in the classification of establishments by type of activity in which the establishments are primarily engaged. <E T="03">See</E> North American Industry Classification System (NAICS), United States, 2022, published by OMB, Executive Office of the President (hereinafter referred to as the “NAICS Manual”), pg. 13. <SU>1</SU> <FTREF/> For purposes of the SIC, an establishment is an economic unit, generally at a single physical location, where business is conducted or where services or industrial operations are performed (such as a factory, mill, store, hotel, movie theater, mine, farm, ranch, bank, railroad depot, airline terminal, sales office, warehouse, or central administrative office). <E T="03">See</E> Standard Industrial Classification Manual, 1987, published by OMB, Executive Office of the President (hereinafter referred to as the “SIC Manual”), Introduction, pg. 12. <SU>2</SU> <FTREF/> The SIC is a hierarchical classification system that includes a two-digit major group, a three-digit industry group, or a four-digit industry code (the most specific classification). <E T="03">Id.</E> Examples of four-digit industry code SIC classifications include metal mining, general building contractors—non-residential buildings, and knitting mills. <FTNT> <SU>1</SU>  To access the 2022 NAICS Manual and other NAICS information, visit the U.S. Census website at <E T="03">https://www.census.gov/NAICS</E> . </FTNT> <FTNT> <SU>2</SU>  To access the 1987 SIC Manual and other SIC information, visit the Library of Congress website at <E T="03">https://guides.loc.gov/industry-research/classification-sic</E> . </FTNT> The ESIC Manual was developed by the Statistical Policy Division of OMB to supplement the SIC by providing a standard for use with statistics about enterprises (rather than “establishments,” the applicable unit for SIC) by kind of economic activity. <E T="03">See</E> Announcement 86-6 (1986-4 IRB 52). For this purpose, the term “enterprise” consists of all establishments under common direct or indirect ownership. An enterprise, for this purpose, is generally defined to include all entities, including su ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 35k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━