The enactment of the Tax Cuts and Jobs Act (TCJA) on December 22, 2017, brought the most sweeping overhaul of the Internal Revenue Code (IRC) since 1986. Most of the changes took effect January 1, 2018. In part one of this article, we discussed the TCJA’s impact on employer provided fringe benefits, in regard to transportation and moving expenses.
In this article, we’ll look at how the TCJA impacts employer provided meals and entertainment, employee achievement awards, and offer our insights, based on conversations with employers across the country, on how the changes may influence an employer’s fringe benefit offerings over the years to come.
Employer Provided Meals and Entertainment
Relevant provisions: IRC §§ 119, 132(e), & 274(n); TCJA §13304
Prior to the enactment of the TCJA, Section 274(n) enabled employers to deduct 50% of expenses for business-related meals and entertainment, such as meals provided for the convenience of the employer or entertainment related to or associated with business. Effective January 1, 2018, the 50% deduction on entertainment expenses is repealed, regardless of whether the entertainment is business-related.
The TCJA extended the 50% deduction limitation to meal expenses that are excluded from an employee’s income due to the de minimis fringe benefit rules. To qualify as a de minimis meal, the eating facility must be located on or near the employer’s business premises (i.e., an employee cafeteria) and the revenue derived from the facility must, at a minimum, equal the direct operating costs.
To meet these requirements without having to charge and process employee payments at the facility, some employers will impute an amount into each employee’s income equal to his or her proportional share of the direct operating costs. However, beginning in 2026, expenses for meals provided for the convenience of the employer and that meet the requirements of the de minimis fringe benefits will be fully nondeductible.
The tax exclusions for employees for employer-provided meals are unchanged by the TCJA. The TCJA also does not impact the employer’s 50% deduction for meal expenses incurred by employees on work travel. However, because the TCJA eliminated the entertainment expense deduction, any expenses associated with an employer’s provision of an onsite gym for employee use are fully nondeductible.
Employee Achievement Awards
Relevant provisions: IRC §§ 74(c) & 274(j); TCJA §13310
Prior to the TCJA, employers could, within limits, provide certain types of employee achievement awards on a tax-free basis. An employee achievement award is an item of tangible personal property that is provided as part of a meaningful presentation to an employee for length of service or safety achievements (e.g., pins, pendants, jewelry, plaques, or pre-selected catalog items after five and 10 years of service).
The TCJA maintains the current exclusion, with a minor change. The TCJA amended Section 274(j)(3) to provide that tangible personal property does not include:
- 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 pre-selected or pre-approved by the employer); or
- Vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds or other securities.
This change codified the guidance previously provided by the U.S. Department of the Treasury in Section 1.274-3(b) of the regulations. In fact, the conference report to the TCJA provides that “[n]o inference is intended that this is a change from present law and guidance.” Thus, this should not alter how employers treat their existing employee achievement award programs.
No Employee Deduction for Unreimbursed Business Expenses
Relevant provisions: IRC §67; TCJA §11045
The TCJA eliminates the ability for employees to deduct unreimbursed work-related expenses (e.g. unreimbursed business mileage) as a miscellaneous deduction on their personal tax returns, effective for taxable years 2018 through 2025. Before the TCJA, employees could deduct their unreimbursed work-related expenses as a miscellaneous itemized deduction, subject to the 2% adjusted gross income limit.
Employers that have reduced their own expenses (or are considering reducing their expenses) by not reimbursing certain employee expenses may reconsider doing so, now that employees will be unable to deduct unreimbursed business expenses on their personal tax returns.
How these changes will affect the provision of fringe benefits to employees remains to be seen. Though some of the TCJA provisions may be more impactful in driving employer fringe benefit policy changes, thoughtful design of compensation and fringe benefit policies and packages can strategically mitigate detrimental tax consequences to both employers and employees.
As employers and employees grapple with how the TCJA will affect their finances, open lines of communication are necessary to ensure a smooth transition to the new rules promulgated by the sweeping tax reform.
|Vicki M. Nielsen is a shareholder in the employee benefits and executive compensation practice of the Washington, D.C. office of Ogletree Deakins. She has worked extensively in executive compensation arrangements, equity compensation and taxation of benefits provided to executives, employees, directors, and independent contractors and related payroll tax issues. Ms. Nielsen regularly advises clients regarding fringe benefits, with an emphasis on income and payroll tax treatment, information reporting, tax penalties, and corrections and penalty abatement options. She is a contributing editor to BLR’s Employer’s Guide to Fringe Benefit Rules.
Michael K. Mahoney is a member of the employee benefits and executive compensation group at Ogletree Deakins. He focuses on employment tax matters at both the federal and state levels, the review of labor and tax laws governing qualified plans, and the strategic design of executive compensation plans for a global workforce. Mr. Mahoney advises employers on a multitude of fringe benefit issues including tax advantageous means of structuring such benefits. He routinely helps clients resolve payroll audits, working with federal and state authorities to reduce assessments on behalf of employers.