The Tax Cuts and Jobs Act was signed into law on December 22, 2017. The Act modifies the tax consequences of certain employer-provided fringe benefits, including those related to transportation, moving, meals, entertainment, and employee awards. The Act also has some surprising implications for nonprofit entities that provide certain fringe benefits to employees. To avoid potential penalties and surprising tax consequences, companies should take action now to assess their benefit arrangements and their accounting systems.
The Act's changes impacting fringe benefits include the following:
1. Qualified transportation benefits
Takeaway: Effective for amounts paid or incurred after December 31, 2017, employers may no longer take a deduction for most qualified transportation fringe benefits. Special rules apply to reimbursements provided for bicycle commuting expenses.
Before the Act, employers could take a deduction for the expense of providing certain qualified transportation fringe benefits to their employees. Such benefits included: (1) transportation in a commuter highway vehicle, if in connection with travel between the employee's residence and place of employment; (2) any transit pass; and (3) any qualified parking, if provided on or near the business premises of the employer or on or near a location from which the employee commutes to work. The Act completely eliminates the ability of an employer to take a deduction under Code section 274 for these benefits—unless such benefits are necessary for ensuring the safety of the employee. Employees, however, may continue to exclude the value of these benefits from taxable income under Code section 132(f). The IRS recently clarified that if an employee uses salary deferrals to pay for these benefits on a pre-tax basis, the employer cannot deduct the salary deferrals on its tax return.
Interestingly, the Act did not fully remove the employer deduction for qualified bicycle commuting reimbursements. It did, however, suspend the ability of the employee to exclude up to $20 per month in bicycle commuting reimbursements from income under Code section 132(f). Until January 1, 2026, employers may still deduct reimbursements for expenses relating to bicycle purchase, improvements, repair, and storage—so long as the bicycle is regularly used for travel between the employee's residence and place of employment. Also until January 1, 2026, employees must now include these reimbursements in income.
2. Qualified moving reimbursements
Takeaway: Effective for taxable years 2018 through 2025, moving expenses must now be included in an individual's taxable income, and may not be deducted.
Before the Act, an individual who moved for work could exclude or deduct related expenses from income. If the individual's employer paid or reimbursed the individual for moving expenses, that reimbursement could be excluded from income under Code section 132. If the individual's employer did not reimburse the individual, the individual could deduct most moving expenses from his or her taxable income under Code section 217.
Now, moving expenses are taxable—reimbursements are no longer excluded from taxable income and deductions are no longer permitted. This applies to all expenses for the packing and moving of personal effects, as well as for any travel and lodging expenses incurred during the move. Members of the Armed Forces, however, who are on active duty and who move pursuant to a military order and incident to a permanent change of station may still be able to exclude reimbursements or deduct expenses from their taxable income.
3. Meals and Entertainment
Takeaway: Effective for amounts paid or incurred after December 31, 2017, employers may no longer deduct expenses for entertainment, and are limited in the amount they may deduct for meals.
- Entertainment: The Act almost completely eliminates the employer deduction for entertainment that was previously permitted under Code section 274. This includes expenses incurred for activities related to entertainment, amusement, or recreation, as well as for facilities used for such activities and dues or fees paid to social, athletic, or sporting clubs or organizations. This applies even if the expense was directly related to business.
- Meals: The Act retains the general rule that employers may not deduct more than 50% of the cost of a business meal. With some limited exceptions, the 50% limitation now also applies to meals provided on or near business premises (which, before the Act, were 100% deductible). Additionally, beginning January 2026, employer deductions for the expense of meals provided for the employer's convenience will be completely eliminated—including food or beverages (such as coffee and danishes) and employee cafeterias that were previously deductible as de minimus fringe benefits.
4. Employee achievement awards
Takeaway: The Act clarifies taxation of employee achievement awards.
The value of prizes and awards received by an individual during a taxable year are generally included in income. As a general rule, though, employees may exclude the value of an award given by their employer—so long as: (1) the value of the award does not exceed the employer's allowable deduction, and (2) the award fits within the definition of an "employee achievement award" provided in Code section 274(j).
The Act retains this general rule, and clarifies the definition of an "employee achievement award." This term has always been understood to exclude cash. The Act explains that the term also generally excludes: cash equivalents, gift cards/gift coupons/gift certificates (unless the employee is allowed to pick from a pre-selected array of options in certain circumstances), vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. If an employee's award falls into any of these categories, its value should be included in that employee's taxable income for the year.
5. An important highlight for nonprofits: certain fringe benefits now included in UBTI
Takeaway: Nonprofits should take note—effective January 1, 2018, certain expenses are now included as unrelated business taxable income.
The Act states that expenses paid or incurred for the provision of qualified transportation fringe benefits, parking facilities, and on-premises athletic facilities for employees will now be included in the unrelated business taxable income (UBTI) of a nonprofit (provided Code section 274 does not permit a deduction for such benefits). Before the Act, these benefits could be provided tax-free.
From a policy standpoint, these new provisions are being billed as an attempt to create an equivalency with for-profit organizations. Before the Act, for-profit organizations had been allowed a deduction for these benefits. The Act removes the deduction for for-profits, and includes the value of such benefits in UBTI for nonprofits. The treatment of an expense as income may seem counterintuitive to many.
The IRS has confirmed that it will release guidelines to clarify application of these rules—including how depreciation may come into play. In the meantime, nonprofits should consult with corporate and tax counsel to assess any potential organizational impact.
Employers should carefully review current arrangements that provide any of the above benefits to their employees. Employers may want to redesign and restructure these arrangements, so as to avoid any new negative tax consequences. Consultation with a tax or benefit attorney may be extremely beneficial—as many of the provisions have varying effective dates, planning now can help prevent unwelcome surprises later.
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.