The Tax Cuts and Jobs Act passed by the US House of Representatives Ways and Means Committee on November 2, and a Description of the Chairman’s Mark of the Tax Cuts & Jobs Act released by the Senate Committee on Finance on November 9, would make sweeping changes to the tax treatment of executive compensation, fringe benefits, and tax-qualified plans (among many other areas) in order to pay for the bills’ centerpiece reductions to corporate and individual tax rates. This blog describes changes that would affect fringe benefits. In anticipation of changes in this area effective for tax years beginning after 2017, we recommend staying abreast of the tax proposals that could impact your business, and preparing for key management to be available to modify documents at the end of December.
A broad range of commonly offered benefits would no longer be excludable from an employee’s taxable wages, including
- Contributions to Archer Medical Savings Accounts (exclusion not denied by the Senate bill)
- Moving expense reimbursements
- Employer-provided dependent care assistance (effective after 2022 in House bill, and exclusion not denied by the Senate bill)
- Employer-provided educational assistance (excepting “job-related” education)
- Employer-provided adoption assistance (exclusion not denied in the Senate bill)
- Employee achievement awards (exclusion not denied in the Senate bill)
- Tuition remission by colleges and universities
- Employer-provided bicycle commuting benefits (exclusion denied only in the Senate bill)
In turn, certain popular employer deductions for employee benefits would be eliminated (even though the benefits themselves may remain excludable), including
- Parking, mass transit, van pooling, and other qualified employee transportation benefits (including all parking facilities used to provide employee parking)
- All business-related entertainment (eliminating the 50% deduction that generally had been allowed for business-related entertainment)
- On-premises gyms and athletic facilities
- Amounts in excess of imputed income for any fringe benefits taxable to employees, including company cafeterias, dependent care facilities, tax-preparation services, and all travel on company-provided aircraft (substantially expanding the deduction limitation that has previously applied only to certain personal executive travel on company aircraft, to cover all employees and contractors, probably to cover business-related entertainment flights on aircraft, and also expanded beyond aircraft to cover cafeterias, dependent care facilities, and (apparently) expenses for tax-return preparation in excess of amounts imputed to the employees)
Notably, however, the bill retains the 50% deduction allowance for food or beverage expenses directly related to the employer’s business (e.g., consumed by traveling employees), and retains the 100% deduction allowance for food or beverages provided in cafeterias on employers’ business premises that is either (a) provided for the employer’s convenience, (b) provided in a company cafeteria meeting the regulatory “direct operating cost” test, or (c) qualifies as “de minimis” food or beverages.
The House bill already has been amended in multiple ways, and several amendments have been proposed in the Senate. We can expect more changes in the weeks ahead as Congress develops a final proposal that satisfies the key limitations imposed by the budget reconciliation process: In order to pass through a simple majority vote in the Senate, the legislation cannot increase the budget deficit by more than $1.5 trillion over a 10-year period and cannot increase the budget deficit by any amount after that period. Both proposals currently exceed the $1.5 trillion figure, and significant “sunset” provisions may be required to satisfy the latter requirement. Since most of the proposed benefits-related changes raise revenue, they may be difficult to remove given these constraints. We will keep you apprised of significant amendments to proposals affecting fringe benefits.