The Tax Cuts and Jobs Act (the Act) cut tax rates for both individuals and businesses, effective for tax years after December 31, 2017. As part of the package, some deductions have been eliminated and certain perceived loopholes closed.
Miscellaneous itemized deductions for individuals have been repealed, which includes unreimbursed employee expenses. If the employer pays for or reimburses employee expenses (often referred to as working condition fringe benefits), they will continue to be tax-free to the employee.
Several fringe benefits that can continue to be provided tax-free to an employee will no longer be tax deductible by the employer.
Certain moving expenses were previously allowed as either an above-the-line deduction to the employee or a tax-free fringe benefit if reimbursed by the employer. Both the above-the-line deduction and the taxable income exclusions provisions have been suspended for taxable years between 2018 and 2025. There is an exception for members of the Armed Forces.
If the employer reimburses these expenses, they will be considered taxable compensation to the employee (and deductible to the employer), similar to a relocation bonus.
Transportation Fringe Benefits
Under the new law, employers are unable to deduct expenses incurred for providing transportation, payment or reimbursement for travel between an employee’s residence and place of work, with the exception of providing employee safety. Some examples of the former transportation fringe benefits included transit passes, qualified parking and vanpooling.
The days of deducting 50 percent of certain business-related entertainment expenses are gone. Under current law, employers cannot deduct expenses for entertainment or recreation, including membership and club dues used for social purposes. There are limited exceptions, such as certain recreational and social events for employees (like a company picnic) will be deductible.
Employers can continue to deduct 50 percent for food and beverage business-related expenses. For example, employers may apply this 50 percent deduction for traveling employees, expenses related to food and beverage provided on premises of the employer and any other de minimis provided at the workplace, such as working or overtime meals (especially during tax season!).
There is still some uncertainty encircling the guidelines on how to treat a business meal with a client, but the IRS has communicated its intention to further define “entertainment” in the coming months. Until further clarification becomes available, the nature of such business meals may be considered 50 percent deductible.
Employer Credit for Paid Family and Medical Leave
In the midst of the aforementioned revenue-stimulating measures, the Act included a promising Employer Credit for Paid Family and Medical Leave. This credit applies to businesses that offer full-time employees at least two weeks of paid family and medical leave, including a pro rata amount for part-time employees. If at least 50 percent of the employee’s wages is paid during leave, the employer will be eligible for a 12.5 percent credit—increasing 0.25 percent for each 1 percent of paid compensation—with a maximum credit of 25 percent should the employer pay 100 percent of the employee’s wages. This credit is only valid for qualified employees in which limitations are applied.
Keep in mind that the State of California already offers a paid family leave package (paid for through payroll taxes); and therefore, we would expect the participation in this benefit to occur in other states.
Fine Tuning Your Fringe Benefits
In an effort to stay in compliance under current law as well as remain competitive in your recruiting and retention initiatives, please contact me at firstname.lastname@example.org to review your fringe benefits offerings. I look forward to maximizing your opportunities.