Product testing can qualify as working condition tax-free fringe benefit
Issue:

Your company has developed a new product and would like to find out how it will be received in the open market. Instead of paying focus groups to test the product, you have suggested that the company’s employees evaluate the product by using it for a specified period. What are the requirements for tax-free product testing by employees?
Answer:    

Qualifying for this working condition tax-free fringe benefit can be a bit trickier than qualifying for other types of fringe benefits. The requirements are not complicated, however.

The fair market value of the use of consumer goods manufactured for sale to nonemployees as a part of an employer's product testing program is excludable from income as a working condition fringe benefit where:

  1. consumer testing and evaluation of the product is an ordinary and necessary business expense of the employer;
  2. business reasons necessitate that the testing and evaluation of the product must be performed off the employer's business premises by employees;
  3. the product is furnished to the employee for purposes of testing and evaluation;
  4. the product is made available to the employee for no longer than necessary to test and evaluate its performance and must be returned to the employer at the completion of the testing and evaluation period;
  5. the employer imposes limits on the employee's use of the product that significantly reduce the value of any personal benefit to the employee; and
  6. the employee submits detailed reports to the employer on the testing and evaluation. The length of the testing and evaluation period must be reasonable in relation to the product being tested.

Employer-imposed limitations. The requirement that an employer place restrictions on the employee's use of the product that significantly reduce the value of any personal benefit (item 5, above) is met if:

  1. the employer places limitations on the employee's ability to select among different models or varieties of the product;
  2. the employer's policy provides for the employee, in appropriate cases, to purchase or lease at his own expense the same type of product as that being tested so that personal use by the employee's family will be limited; and
  3. the employer generally prohibits use of the product by members of the employee's family.

The program must meet all of these requirements for the use of the employer's goods or product to be excludable from income.

Source: CCH Employee Benefits Management
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