While last year’s passage of tax reform substantially lowered the corporate tax rate, it also eliminated tax breaks for certain employee fringe benefits. Given the short notice of many changes under the new tax code, you may want to consider carefully reviewing current programs and ensuring they are providing benefits in the most tax-efficient way possible.
Fringe benefits impacted by tax reform
Some popular tax breaks for employee fringe benefits have been excluded in the tax law. As a result, employers should determine if adjustments are needed. Depending on the cost of these benefits and how much employees use them, changes may be in the best interest of both employers and employees. Here’s a brief overview of the changes:
- Qualified moving expenses: The law removes the exclusion for employer-provided qualified moving expenses. As of January 1, 2018, employers can no longer provide tax-free reimbursements for employees' moving expenses (with the exception of U.S. armed service members on active duty).
- Employee achievement awards: Certain types of awards will no longer be considered exempt from taxes. This includes what is defined as "tangible personal property" in the context of employee achievement awards. Examples of excluded items that are now taxable include:
- Cash, cash equivalents, gift coupons, or certificates
- Employee vacations
- Meals, lodging, or tickets to theater or sporting events
- Stocks, bonds securities, or other similar items
- Bicycle commuting reimbursement: Gross income and wages for qualified bicycle commuting reimbursements are now included in taxable income.
Evaluating the cost and benefits of affected fringe benefits
If providing fringe benefits is critical to competing for top talent in your industry, you may consider continuing to offer them, despite whether the cost can be deducted from your taxes. Current utilization of these benefits may play a part in the decision. For example, in some geographic locations such as large cities, the labor market may maintain demand for subsidization of commuter benefits.
Another factor is the state in which you live. Some states decoupled their tax structures from the IRS as they apply to these fringe benefits. So even if they are taxable for federal income tax, in some geographies they may be exempt from state income tax. Be aware if there is a benefit on the state side to your employees.
Similarly, in regard to moving expenses, employers will have to decide how to handle this shift. In tight labor markets, funding moving expenses to attract top talent may be an important part of your recruiting strategy.
End of the itemized deduction for employee expense reimbursement
Because tax reform also impacts the deductibility of expenses, employers should examine their reimbursement policies to determine whether changes are warranted. Previously, employees who itemized deductions on Schedule A of their tax return could deduct the costs of unreimbursed expenses such as uniforms, job-related mileage, and costs related to a home office, if used regularly for work. These items fell under Miscellaneous Deductions and were permitted if they totaled over 2 percent of adjusted gross income. Since these deductions are no longer available, employees are now forced to bear a higher cost of these expenses. As such, employers may want to rethink their expense reimbursement plan or make changes in company policies to help lessen the cost of these items for their employees.
Certain tax changes may require a reallocation of your HR budget to ensure you're offering the best benefits to your employees. It’s more important than ever to be proactive and stay aware of changes related to the tax treatment of fringe benefits.