Tax Reform Limits or Eliminates Several Deductions and Exemptions for Employee Fringe Benefits

The 2017 tax reform reconciliation act, commonly referred to as The Tax Cuts and Jobs Act (TCJA), makes significant changes to the tax deductibility of certain fringe benefits provided to employees that may affect the way employers deliver them.

Because the tax impact of these changes will be felt immediately, it’s important for companies to consider if they’re going to make changes to their benefit programs, and, if they do, how to communicate those changes to their employees. This may include reviewing current reimbursement policies and accountable plan strategies as well as outstanding employment offer letters for any possible negative tax impacts to individual employees, the company, or both.

Even if changes aren’t made, companies need to evaluate their internal accounting procedures for these expenditures. For items that are no longer deductible or where the deduction is limited, adjustments will be required to compute taxable income. This makes it important to verify these costs can be easily identified and appropriately classified.

What’s Changing

Effective for amounts paid or incurred on or after January 1, 2018, the TCJA changes the tax treatment of the following fringe benefits.

Transportation

Employers will no longer be able to deduct commuting benefits provided to employees, such as parking reimbursements or transit passes. However, the exclusion from income for these benefits received by an employee is retained.

The TCJA also repeals the qualified bicycle commuting reimbursement, which allows employees to exclude from their income bicycle commuting reimbursements of up to $20 per qualifying bicycle each month. The qualified bicycle commuting reimbursement exclusion sunsets December 31, 2025.

Some local laws require companies to offer certain transportation benefits to their employees. Careful consideration should be given to these local laws before any changes are made to the commuting benefits companies offer their employees.

Moving Expenses

The exclusion and deduction for qualified moving expense reimbursements is eliminated through December 31, 2025, with some exceptions for members of the military.

Employee Achievement Awards

The TCJA defines tangible personal property for purposes of employee achievement awards. Previously, the tax code didn’t. Because of this, benefits that are provided as employee achievement awards but aren’t considered tangible property under the new law can’t be excluded from employee income.

The TCJA’s definition of tangible personal property doesn’t include the following:

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

Meals and Entertainment

The TCJA repeals the deduction for entertainment, amusement, or recreation, 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, golf and athletic clubs, night clubs, and country clubs.

The 50% 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 employers. These costs were generally fully deductible under prior law. They remain nontaxable to employees.

We’re Here to Help

For more information on how the TCJA may affect your organization’s employee benefits and how they impact your tax return, contact your Moss Adams professional. You can also visit our dedicated tax reform page to learn more.