Section 162 applies to all businesses including partnerships and corporations. A necessary and ordinary expense that benefits an employee of the business will also be deductible by the business, even if the employee benefit is excluded from the employee s taxable income. A fringe benefit is any compensation or other employee benefit that is not in the form of cash. Some employee benefits may be excluded from the employee s gross income and therefore are not subject to income tax. Other employee benefits are taxable to the employee.
Employee benefits are excludable from income only if so specified by the tax code.
From the perspective of an owner who is also an employee of a business entity, an employee benefit will generally provide two favorable tax benefits. The employee benefit is tax deductible by the business that pays the expense, and tax free or tax deferred to the employee that receives the benefit. For employee benefit purposes, the same is generally true except for several specific exceptions. Cost of an accident and health plan. Cost of meals and lodging furnished for employer s convenience.