How Businesses Must Treat Certain Employee Fringe Benefits by Dustin Grizzle
Posted on January 18, 2019 by
Companies must be prepared for how the new tax law affects their bottom lines and the tax liabilities of their businesses and their employees. For example, tax reform changed the treatment of many of the benefits that businesses extend to their workers. As a result, businesses should evaluate whether or not the value of providing these fringe benefits to employees outweigh the costs they incur for doing so, especially when it could result in the loss of a tax deduction and/or the addition of a new tax liability.
Meals and Entertainment
While the new tax law eliminated the availability of deductions for entertaining clients and employees, businesses can continue to deduct 50 percent of the costs they incur for meals they enjoy with current or potential clients, consultants or other business contacts at entertainment events, as long as those meals are not lavish, and they are considered ordinary and necessary for the active conduct of the taxpayer’s trade or business. Doing so requires businesses to retain receipts demonstrating that the food costs were separate from and independent of any amounts they paid for “entertainment,” such as tickets to a sporting event.
Reimbursements for Employees’ Qualified Moving Expenses
Under prior law, payments businesses made to reimburse their employees for qualified moving expenses were provided to those workers tax-free. With the new tax laws, however, businesses must generally treat those payments as employee wages subject to federal income and employment taxes unless they qualify for one of the following exceptions:
- The employee is an active duty member of the U.S. Armed Forces whose move is a result of a military order and he or she would have qualified to treat moving expenses as a tax deduction had he or she not received reimbursements from his or her employer;
- The reimbursement paid in 2018 is for costs related to a move that an employee made in 2017 or prior years; and
- The employer paid a moving company directly in 2018 for qualified moving services provided to an employee before 2018.
These are the only situations in which workers may exclude from their taxable income the amounts they received as employer reimbursements of moving expenses beginning in tax year 2018. In addition, employees must not have deducted those expenses on the tax returns they filed for 2017. If an employer mistakenly treated reimbursed moving expenses covered by these exceptions as taxable employee income in 2018, it must take steps to correct those employee’ taxable wages and employment taxes.
Reimbursements for Employees’ Bicycle Commuting
While businesses may continue to deduct as business expense the amounts they reimburse workers for qualified bicycle commuting, they must now include all of those amounts as taxable wages to employees for tax years 2018 through 2025. In other words, employees will no longer receive the same tax-free benefits for commuting to work on bicycle as they did in prior years.
Deductions for Qualified Commuter Transportation
Beginning in 2018, businesses and non-profit organizations may no longer deduct the expenses they incur for providing workers with transportation fringe benefits, including employee parking and the costs associated with transporting workers for commuting purposes. The one exception to this rule applies to transportation that is necessary for employee safety, such as a car service to take the employee home after a late night meeting or event.
Businesses may claim deductions for plaques, watches and other awards of tangible personal property that they award to employees, subject to annual deduction limits; awards of cash, gift certificates, vacations or event tickets are not deductible business expenses. Similarly, employees may exclude from their taxable income the value of awards that are considered tangible personal property.
The new tax law made a number of changes to how employers and employees may treat certain work-related benefits in 2018 through 2025. Businesses should meet with experienced advisors and accountants to navigate the new law and implement smart strategies that may help them use fringe benefits to attract and retain workers without incurring additional costs.
About the Author: Dustin Grizzle is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides tax-planning and compliance services to high-net-worth individuals and businesses in the manufacturing, real estate management and property investment industries. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at email@example.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.