The Tax Cuts and Jobs Act of 2017 eliminated employers' ability to deduct many fringe benefits and other business expenses, such as entertainment expenses, and reduced employers' ability to deduct other expenses, such as employer-provided meal expenses. Relevant to executive compensation professionals (in addition to eliminating the deduction for reimbursement of moving expenses) was the addition of a new subparagraph (l) to Section 132, titled "Transportation and Commuting Benefits." New subparagraph 132(l) provides that no deduction is allowed for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee in connection with travel between the employee's residence and place of employment, except as necessary for ensuring the safety of the employee.
Late last month, my partners, Ruth Wimer and Nancy Gerrie, posted a useful discussion of Security Studies Can Provide Tax Benefits and Protect Valued Executives, which highlights a small but potentially important change made by the 2017 Tax Cuts and Jobs Act. This topic is particularly relevant now that proxy season and payroll season are each heating up, and companies must carefully tally up all the taxable and non-taxable fringe benefits they provide to employees. As Ruth says in her post:
The Internal Revenue Code makes clear that, unless there is a specific authorized exemption from taxation, employers must treat any in-kind or cash benefit as taxable to the employee, include the benefits on Form W-2, and withhold employment taxes. It is common for employers to take advantage of tax exclusions for health insurance, life insurance, and business travel, meals, and entertainment. However, many employers do not realize that an "overall security program" that provides for bodyguard chauffeurs, private air travel, and/or security features on company-provided automobiles also may allow for exclusion of those benefits under the favorable provisions of Code Section 132.
IRS guidance provides that if an employer establishes an "overall security program," specified employees may receive certain otherwise personal benefits on a tax-free basis. These benefits include a bodyguard chauffeur for unlimited business and personal travel, security features on a company-provided automobile, and the excess cost of travel on employer-provided aircraft. Importantly, these benefits also can be provided to the executive's spouse and dependents. An overall security program is deemed to exist in one of two ways: A 24/7 security program (which few executives would want), or an "Independent Security Study."
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There are several added benefits to obtaining an Independent Security Study. Substantively, the security firm conducting the study provides valuable insight and techniques to keep the work environment and the personal life of the employee safer, and the cost of the study is not taxable income to the employee. More recently, the Tax Cuts and Jobs Act now disallows deductions for any payments provided to employees by an employer for commuting expenses but provides an exception where there are security concerns, which would very reasonably be the case where an Independent Security Study is in place.
Companies should explore obtaining an Independent Security Study, where either work-related or other types of security threats exist, in order to obtain significant tax and safety benefits for both employees and employer.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
