Are Employer Cash Incentives---for the Purchase of a Hybrid Car---Taxable?

To encourage employees to purchase environmentally-friendly hybrid vehicles, your company has been thinking of offering "rebates" or cash incentives to its employees in select areas to offset the purchase price of these cars. Are these incentives taxable?

Just like other forms of compensation, these cash incentives are taxable compensation. Employers should include the cash incentive amounts in employees' compensation reported on year-end Form W-2 earnings statements. The cash incentives also are subject to income tax withholding and employment tax.

The tax code provides for an exclusion from income for employee discounts only if the employer produces the product and certain other requirements are met. The tax code already includes incentives for the purchase of hybrid cars. The Alternative Motor Vehicle Credit for hybrid vehicles applies to vehicles purchased on or after January 1, 2006.