On December 22, 2017, President Donald Trump signed the highly touted Tax Cuts and Jobs Act (TCJA) into law. Among other things, the TCJA is intended to reduce tax rates for businesses and individuals and simplify income tax preparation by increasing the standard deduction and family tax credits, reducing the alternative minimum tax for individuals, and eliminating it for corporations.
However, the new law also limits the tax deductions businesses can claim for certain employee benefits and may change the way employers settle legal claims in the future. Below is a summary of the provisions relevant to employers.
Tax Penalty for NDAs
When settling claims of sexual abuse or harassment, businesses often condition payment of a settlement amount on the individual’s execution of a nondisclosure agreement (NDA). The TCJA seeks to discourage the use of NDAs in sexual harassment settlements by prohibiting the tax deduction of any settlement or payment related to sexual harassment or sexual abuse if the settlement or payment is subject to an NDA, as well as any attorneys’ fees related to the settlement or payment.
How that provision will work when sexual harassment/abuse claims are accompanied by other types of claims remains to be seen. As a result of the change, employers must be cognizant of the potential tax implications of entering into NDAs when settling sexual harassment or abuse claims, and weigh the costs and benefits of using an NDA.
Tax Subsidy for Paid FMLA Leave
The federal Family and Medical Leave Act (FMLA) currently requires certain employers to provide eligible employees up to 12 weeks of leave per year for specific family and medical reasons. FMLA leave can be paid or unpaid at the employer’s discretion. However, the TCJA seeks to encourage employers to provide paid leave by allowing covered employers to take a tax credit for family and medical leave wages paid to qualifying employees.
Under the TCJA, qualifying employers will be allowed to claim a general business credit equal to a percentage of the wages paid to qualifying employees on leave under the FMLA.
For example, an employer may take a credit of 12.5% of the amount of wages paid to a qualifying employee on leave if the employer provides a minimum of 2 weeks of leave and the employee’s compensation is 50% of his normal wages. The credit increases by 0.25% for each percentage point by which the compensation rate exceeds 50% of the employee’s normal wages, up to a maximum credit of 25%. The maximum amount of FMLA leave that may be taken into account is 12 weeks. To be eligible for the credit, employers will need to have written policies that meet various requirements set forth in the TCJA.
Some employers allow employees to use paid time off (PTO) for FMLA and non-FMLA absences, and others offer short-term disability benefits that provide compensation for otherwise unpaid FMLA leave. Some cities, including Chicago, New York, and Seattle, have enacted ordinances that provide paid sick leave for FMLA-permitted purposes. Some or all of those scenarios may allow for the tax credit, but employers must draft such policies carefully.
Employers will be able to apply the credit only toward FMLA-related wages paid to workers who earn less than $72,000 per year. Moreover, the credit is set to expire on December 31, 2019. However, lawmakers may revisit the tax credit before it expires and extend it.
Transportation and Meal Expenses
Under current IRS regulations, employee transit benefit programs may allow employees to use pretax dollars, and employers to deduct their contributions to such programs, up to certain limits (e.g., $255 per employee per month in transportation and parking expenses, and $20 per employee per month for biking-related expenses).
The TCJA eliminates the business deduction for qualified mass transit and parking benefits, and employers will no longer be able to deduct amounts incurred or paid for qualified transportation fringe benefits (e.g., parking, transit, and vanpooling).
The TCJA also eliminates the deduction for expenses related to employee meals. However, the Act expands the 50% limit on de minimis (minimal) fringe benefits to on-site eating facilities until December 31, 2025. Afterward, employer costs for providing food and beverages to employees through an on-site facility will not be deductible.
Employee Achievement Awards
Before the enactment of the TCJA, an employer could deduct up to $400 for the cost of an “employee achievement award” given annually to an employee. IRS regulations define “employee achievement award” to include length-of-service awards, safety awards, and awards given during meaningful presentations.
Under the TCJA, achievement awards of tangible personal property may still be treated as deductible by the employer. However, what constitutes “tangible personal property” is now defined to exclude cash, cash equivalents, gift cards, gift coupons or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items preselected or preapproved by the employer), vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and similar items.
Employee Moving Expenses and On-Site Athletic Facilities
The TCJA suspends the deduction for employee moving expenses paid for or reimbursed by the employer from 2018 through 2025. There’s an exception for active-duty members of the armed forces. Moving expenses were once a common perk for transferring executives, but this provision of the Act may end such relocation incentives.
The TCJA also eliminates deductions for on-premises athletic facilities, requiring employers to pay unrelated business income tax for providing this fringe benefit.
Most employers likely will not be surprised by what’s in the TCJA since it has been widely covered by the media. However, several proposed provisions didn’t make it into the Act, and others that weren’t as widely covered appear in the final version.
Consequently, you would be well-advised to meet with trusted legal and tax advisers to review the implications on your business practices and amend your policies and plan documents to reflect any changes that may be precipitated by the TCJA’s passage.