Tax Reform – Compensation and Employee Benefits

by Tracy Paglia, Moss Adams

The Tax Cuts and Jobs Act (TCJA), signed into law in late December 2017, is the most widespread change to the tax code in over 30 years. Provisions in the law affect almost every U.S. taxpayer, sometimes in significant ways. This series of articles will highlight some of the more wide-reaching provisions.

Employee benefits is an area of significant change for employers of all kinds effective January 1, 2018:

Moving costs: prior to the TCJA, employers could pay for qualifying moving expenses for employees as a nontaxable benefit assuming certain time and distance tests were met. As of January 1, reimbursement to an employee, or payment of moving costs to a third party, are taxable income to the employee. Agreements to pay for these expenses entered in to prior to January 1 were not grandfathered in; employers are encouraged to talk with employees who may be receiving an unexpected tax bill in 2018 as a result of this change.

Qualifying transportation costs: For employers providing free or discounted parking or transit passes, this expense is either no longer deductible (for-profit employers) or will be unrelated business income to be reported on Form 990-T (tax-exempt employers), to the extent the benefit is not treated as taxable compensation to employees. In addition, if a tax-exempt employer maintains a “qualified parking facility” for employee use, the cost of maintaining the facility (e.g. parking lot or parking structure) will also be unrelated business income. Finally, the exclusion from taxable income for the bicycle community reimbursement has been repealed, making this benefit taxable compensation to the employee if it is paid after December 31, 2017.

On-premises athletic facility: If an employer maintains a gym or other athletic facility

1) which is located on the premises of the employer, 2) which is operated by the employer, and 3) substantially all the use of which is by employees of the employer, their spouses, and their dependent children, then the expense of maintaining the facility is nondeductible (for-profit employer) or is unrelated business income (tax-exempt employer). Additionally, the deduction for certain membership dues (for business, pleasure, recreational, or social clubs) has been repealed, making the expense no longer deductible for for-profit employers or tax-exempt employers who previously deducted these expenses against unrelated business income.
  

Excise tax on compensation: Tax-exempt employers will be liable for a 21 percent excise tax on:

1) compensation paid over $1 million to a covered employee (excluding compensation paid to a licensed medical professional for the performance of medical services), and

2) excess parachute payments paid to any covered employee, which is a separation payment where the present value of the payments is equal to or more than three times the employee’s five year average compensation.

The law defines “covered employee” as the 5 highest compensated employees for the taxable year, and anyone who was a covered employee for any year beginning after December 31, 2016. Therefore, once an employee becomes a covered employee, they remain one for all future years.

This provision could affect tax-exempt employers in the year a §457(f) nonqualified deferred compensation benefit vests, or if a substantial bonus is awarded. Tax-exempt employers should review compensation packages which may result in a covered employee being paid in excess of $1 million to modify contracts or prepare to pay the excise tax. 

Meals and Entertainment: The TCJA repeals the deduction for entertainment, amusement, or recreation for for-profit companies and tax-exempt organization with unrelated business income, which was deductible under prior law if it was directly related to—or associated with— the active conduct of the taxpayer’s trade or business. This includes expenses for theaters, sporting events, gold and athletic clubs, night clubs, and country clubs.

The 50 percent limit on the deductibility of business meals is also expanded to include meals provided on the premises of the employer, which means meals provided at such facilities will cost more to for-profit employers. These costs were generally fully deductible under prior law. They remain nontaxable to employees.

Employee Achievement Awards: The TCJA provided new definitions of “tangible personal property” for purposes of employee achievement awards. This clarification is causing some employer award plans to result in taxable benefits to the employee which may have previously been excluded from taxable compensation.

The TCJA clarified that the following do not qualify as tangible personal property and therefore will be taxable compensation if given to an employee:

  • Cash and cash equivalents 
  • Gift cards, coupons, and certificates 
  • Vacations 
  • Meals
  • Lodging
  • Tickets to theater or sporting events
  • Stocks, bonds, and other securities 
  • Other similar items

For more information about these changes and other tax reform provisions, visit our website at www.mossadams.com/tax-reform and https://www.mossadams.com/articles/2018/march/how-tax-reform-impacts-fringe-benefits