Below is the second article in our series covering the employee benefits-related changes contained in the Tax Cuts and Jobs Act signed by the President on December 22, 2017.
As discussed below, the Act makes several changes to the taxability and deductibility of employee fringe benefits beginning January 1, 2018.
The changes are somewhat arbitrary and sporadic. Basically, employer payment or reimbursement of an employee’s business expenses (so-called working condition fringe benefits) will continue to be tax-free to the employee and tax deductible by the employer. But certain fringe benefits that still can be provided tax-free to an employee will no longer be tax deductible by the employer. On the other hand, if an employer chooses to provide the affected fringe benefits on a taxable basis to the employee (i.e., as W-2 wages), the employer will be able claim a tax deduction for the taxable benefits.
The following is a summary of the employee fringe benefits affected by the Act.
Employees Can No Longer Deduct Unreimbursed Business Expenses
Prior to the Act, an employee who itemized tax deductions could deduct unreimbursed employee business expenses as a miscellaneous itemized deduction (to the extent that the aggregate miscellaneous itemized deductions exceeded 2% of the employee’s adjusted gross income). However, beginning January 1, 2018 miscellaneous itemized deductions are no longer allowed. That means that if an employer reimburses an employee for a business expense, the reimbursement is tax-free to the employee. However, if the employer does not reimburse the employee’s business expense, the employee no longer will be able to claim a tax deduction for the expense.
Prior to the Act, an individual could claim an above-the-line deduction (a non-itemized deduction) for moving expenses paid in connection with commencement of work at a new principal place of work. . Alternatively, an employer could pay or reimburse an employee for moving expenses as a tax-free fringe benefit.
Beginning in 2018, an employee can no longer deduct moving expenses nor can an employer pay or reimburse an employee’s moving expenses on a tax-free basis. On the other hand, if an employer treats payment or reimbursement of an employee’s moving expenses as W-2 wages, the employer can deduct the payment as a compensation expense.
Qualified Transportation Benefits
Prior to the Act, the value of a “qualified transportation fringe” benefit provided by an employer to an employee is treated as tax-free, subject to monthly limits. A “qualified transportation fringe” is defined as:
- transportation in a commuter highway vehicle for travel between the employee’s residence and place of employment;
- transit passes;
- qualified parking; and
- qualified bicycle commuting reimbursement.
Employers can still provide tax-free qualified transportation fringe benefits to employees (although qualified bicycle commuting reimbursements cannot be provided tax-free). However, an employer cannot deduct the expenses for providing tax-free transportation fringe benefits.
- On the other hand, if an employer treats the transportation fringe benefits as taxable W-2 wages to the employee, the employer can deduct the expenses of providing those benefits.
The Act provides that an employer cannot deduct any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer for travel between the employee’s residence and place of employment, except as necessary for ensuring the employee’s safety.
In general, commuting expenses always have been treated as taxable to an employee.
The Act provides that an employer cannot claim a tax deduction for entertainment, amusement or recreation expenses or with respect to any facility used in connection with such activity. The Act also prohibits any deduction for amounts paid for membership in any club organized for business, pleasure, recreation or social purpose. In contrast to prior law, it does not matter whether the expense is directly related to or associated with the active conduct of the employer’s trade or business.
Note that an employer can still fully deduct expenses for goods, services or facilities that are treated as W-2 wages to the employee. In addition, an employer can fully deduct expenses paid to reimburse an employee under a reimbursement or other expense allowance arrangement that can be treated as tax-free to the employee under the accountable plan rules.
Expenses for Employer-Operated Eating Facilities Only 50% Deductible
The Act does not change the rules for determining whether the value of meals provided to an employee at employer-operated eating facility can be treated as tax-free to the employee.
- Section 132(e)(2) provides that the value of the meals can be tax-free if: (1) the facility is located on or near the employer’s business premises, (2) the facility’s annual revenue equals or exceeds its direct operating costs; and (3) for highly compensated employees, the facility is operated without discriminating in favor of such employees.
- Section 119 provides the value of meals furnished to an employee can be tax-free if: the meals are provided on the employer’s business premises; and (2) are provided “for the convenience of the employer”.
However, the Act now imposes a 50% limit on deducting food or beverage expenses to employees at an employer-operated eating facility. These expenses are made fully nondeductible after Dec. 31, 2025.
Definition of Tangible Personal Property for Tax-Free Employee Achievement Awards
The Code permits an employer to make a tax-free award of tangible personal property to an employee for length-of-service or safety achievement subject to certain conditions and dollar limits.
The Act codifies the definition of “tangible personal property” (based on the proposed regulations issued in 1989) to state that tangible personal property does not include
- cash, cash equivalents, gift cards, gift coupons, or gift certificates; or
- vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.
However, arrangements that confer only the right to select and receive tangible personal property from a limited array of items pre-selected or pre-approved by the employer qualify as tangible personal property.