United States: How Tax Reform Will Change The Treatment Of Fringe Benefits

Last Updated: January 23 2018
Article by Mary B. Hevener, Jonathan Zimmerman and Anna M. Pomykala

Several employer deductions will be reduced or eliminated, including the cost of business-related entertainment expenses and qualified transportation fringe benefits, but employers may be able to claim a credit for a percentage of wages paid to qualifying employees on family and medical leave. Among other changes, the law repeals the deduction of alimony payments, and employees can no longer exclude moving expense reimbursements they receive from employers or deduct moving expenses they pay themselves.

The recent tax reform legislation (HR 1 or the Act) makes significant changes to the treatment of fringe benefits under the Internal Revenue Code, most of which are effective for taxable years beginning on and after January 1, 2018. Some of the changes affect the employer deduction for fringe benefits, while others affect the tax treatment for employees. The Act includes miscellaneous additional changes, but some changes proposed in the original House and Senate bills were not included in the final legislation.

Employer Deductions

The Act will curtail or eliminate a number of employer deductions for employee benefits, except to the extent such amounts are treated as income to the employee.

  • Employers may no longer deduct the cost of providing qualified transportation fringe benefits to employees (e.g., qualified parking, mass transit passes, van pooling), including benefits provided through direct payment, reimbursement, or salary reduction arrangements.
  • Employers may not deduct any expense incurred for providing transportation, or any payment or reimbursement, for travel between an employee's residence and place of employment, except to ensure employee safety or (for 2018 through 2025) to provide qualified bicycle commuting reimbursements.
  • Employers may no longer deduct any business-related entertainment expenses, regardless of whether the item is associated with the conduct of the employer's trade or business. This change eliminates the 50% deduction that generally had been allowed for business-related entertainment. This may trigger an expansion of the deduction disallowance rules applicable to airplane travel (and use of entertainment facilities), which since 2005 have generally limited deductions for "entertainment flights" by top executives to the amount imputed or charged. Those disallowance rules historically have not applied to business entertainment flights.
  • Employers will continue to be allowed a 50% deduction for food or beverage expenses directly related to the employer's business (e.g., consumed by traveling employees). For now, this 50% deduction will be available for expenses associated with providing food and beverages in cafeterias and snack rooms on employers' business premises that (a) are provided for the convenience of the employer or (b) qualify as de minimis food or beverages, but this deduction will be disallowed for any such expenses paid or incurred on or after January 1, 2026. The law does not include the House bill's proposal to disallow deductions for any de minimis expenses, e.g., for food and beverages, that are paid under a reimbursement arrangement with a tax-exempt organization. Under Code Section 274(e)(4), there continues to be an exception from the 50% disallowance for food and beverages for holiday parties and social events.
  • New Code Section 162(f) generally prohibits employers from deducting settlement payments to the government and certain quasi-governmental entities, subject to exceptions for payments that are attributable to restitution or compliance and are specifically designated as such. The government party to the settlement is required to issue an information return to the employer and to the Internal Revenue Service (IRS), stating the amount of the overall settlement and what portions of the overall settlement are attributable to deductible restitution and compliance costs. Settlement negotiations, therefore, must now address these new requirements in order for a taxpayer to be able to later deduct any part of a settlement payment. These rules will apply to employment-related settlements that involve government agencies. For further reading on this topic, see our previous LawFlash.

Employee Exclusions

The new legislation also affects employees by changing the individual tax treatment of certain fringe benefits.

  • The exclusion for qualified moving expense reimbursements is suspended for taxable years 2018 through 2025. Correspondingly, the deduction for moving expenses is suspended for the same period. (In both cases, there is an exception for active duty members of the Armed Forces). This means that employees cannot exclude moving expense reimbursements they receive from employers, and cannot deduct moving expenses they pay themselves. However, employers may deduct moving expense reimbursements that are treated as taxable compensation to employees. The regulations under Code Section 217 raise questions as to when a moving expense is "paid or incurred," which creates uncertainty about the tax treatment of moves completed in 2017 but for which the underlying expenses are not paid until 2018.
  • The exclusion for qualified bicycle commuting reimbursements is suspended for taxable years 2018 through 2025.
  • Earlier provisions that would have eliminated other exclusions do not appear in the final legislation and thus remain in effect, including educational assistance benefits, tuition assistance benefits, employer contributions to Archer Medical Savings Accounts, employer-provided dependent care assistance, and employer-provided adoption assistance.
  • The Act maintains, with only a minimal change, the current exclusion for employee achievement awards, essentially codifying the proposed regulations that have been applicable since 1987. The exclusion is limited to "tangible personal property." The regulations provide that this term does not include any cash, cash equivalents, gift cards, gift coupons, or gift certificates, nor any vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. The Act clarifies that the general prohibition on any awards of gift cards, gift certificates, or coupons does not apply to "arrangements conferring the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer." The conference report accompanying HR 1 notes that "no inference is intended that this is a change from present law and guidance," presumably to indicate that this provision does not retroactively approve generous awards programs that may have been implemented under the proposed regulations.

Other Changes

The legislation creates a new credit for employers but suspends or repeals other deductions, including for tax preparation expenses and alimony payments.

  • For wages paid in 2018 and 2019, new Code Section 45S provides employers with a general business credit of up to 25% of the amount of wages paid to qualifying employees during the period employees are on family and medical leave, subject to certain conditions.
  • The conference report removes "any computer or peripheral equipment" from the definition of "listed property" (under Code Section 280F), relieving taxpayers of the heightened requirements for substantiating the expense and business usage of such property under Code Section 274 and the accompanying regulations. This change applies to property placed in service after December 31, 2017.
  • The itemized deduction for tax preparation expenses is suspended for taxable years 2018–2025 as part of a broader suspension of miscellaneous itemized deductions subject to the 2% floor.
  • The Act repeals the deduction for alimony payments, effective for divorce and separation agreements executed after December 31, 2018, or modified after this date to expressly be subject to this repeal. This provision will have significant ripple effects, with the payment of alimony from after-tax dollars effectively reversing the current treatment of alimony in multiple contexts, including a potential reversal of the IRS guidance (in place since 2004) providing that stock options and deferred compensation earned by an employee and transferred to the employee's former spouse are taxable and reportable to the former spouse. However, since those rulings deal not with alimony, but instead with marital property subject to equitable division in the event of divorce, it is not entirely clear whether, under the new rules, the stock option and deferred compensation income would necessarily revert to being taxable to the employee.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Ogletree, Deakins, Nash, Smoak & Stewart
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Ogletree, Deakins, Nash, Smoak & Stewart
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions