The Impact of Tax Reform on Employer-Provided Fringe Benefits

The Tax Cuts and Jobs Act (TCJA) made significant changes to the tax deductibility of certain fringe benefits provided to employees.

As a result, companies should assess their current policies to determine if a change in their business expense policies is necessary. Certain system changes may also be necessary to segregate deductible and non-deductible items. The following discussion addresses some of the new rules applicable to employer-provided fringe benefits as implemented by the TCJA.

Meals and Entertainment

Before the TCJA, generally 50% of meal and entertainment expenses were deductible under Sec. 274 as long as they were ordinary, necessary and directly related to the employer’s trade or business. Certain expenses, such as qualified employee recreation, tickets to qualified charitable events and qualified de minimis meals, were fully deductible if certain conditions were met.

For expenses paid or incurred on or after January 1, 2018, the rules regarding meals and entertainment have significantly changed. Expenses incurred for entertainment may no longer be deductible and only 50% of meals are deductible unless they fall under specific exceptions set forth in Sec. 274(e).

  • Qualified Employee Recreation – Expenses for qualified employee recreation (e.g., office holiday parties or summer picnics) continue to be fully deductible when provided primarily for the benefit of employees other than officers, shareholders/other owners who own a 10% or greater interest, or highly compensated employees.
  • Entertainment – The TCJA repeals the prior deduction for entertainment, amusement, or recreation expenses directly related to the active conduct of the taxpayer’s trade or business. Under prior law, 50% of these expenses were deductible. This includes expenses for theater tickets, sporting events, golf and athletic clubs, and country clubs. Food and beverages provided during entertainment events will not be considered entertainment if purchased separately from the event, or stated separately on a bill, invoice or receipt.
  • Business Meals – Fifty percent of business meals (e.g., employee travel meals or client meals) remain deductible if: 1) the meals are not lavish or extravagant under the circumstances, and 2) the taxpayer (or an employee of the taxpayer) is present during the meals. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.
  • Meals Provided for Convenience of the Employer – On-premises meals that are considered de minimis fringe benefits (the value and frequency with which they are provided is so small as to make accounting for them unreasonable or impractical) or are provided for the convenience of the employer are no longer fully deductible. Instead, there is a 50% deduction for such meals if they are provided for a substantial non-compensatory business reason, as defined in Reg. 1.119-1(a)(2). The employer’s business policy for providing the meals is relevant in determining if a substantial non-compensatory business reason exists for the deduction. The employer should ideally have their business policy in writing.
  • Expenses Treated as Compensation – Meals and entertainment expenses treated by the taxpayer as compensation paid to an employee are fully deductible under Sec. 274(e)(2). For example, an employer who treats an employee to an expense-paid trip as a reward can deduct the expense to the extent the employer treats the expense as compensation and wages paid to the employee.

Transportation

Section 132(f) provides employees an exclusion from gross income for qualified transportation fringe benefits provided by an employer. Qualified transportation fringe benefits include qualified parking (at or near the employer’s premises or a location from which the employee commutes to work by public transit), transit passes, vanpool benefits and qualified bicycle commuting reimbursements. Under pre-TCJA law, these benefits were also deductible by the employer as employee compensation.

The TCJA eliminated the employer deduction for 1) qualified transportation fringe benefits, and 2) any expense, or any payment or reimbursement, incurred in providing transportation between the employee’s residence and place of employment, except as necessary for the safety of an employee. Employees are generally still entitled to exclude qualified transportation fringe benefits from income; however under the new law the exclusion for qualified bicycle commuting reimbursements (up to $20 per month) is eliminated.

Moving Expenses

Under prior law, individual taxpayers could deduct the reasonable cost of moving, along with travel costs of moving to a new home under Sec. 217, provided the following requirements were met:

  • Employers did not pay or reimburse the moving costs and exclude the payment or reimbursement from taxpayer’s income;
  • The new work location was a certain distance from the former home; and
  • The expenses were closely related in time to the start of work at the new location.

There was also a related income exclusion under Sec. 132(g) for qualified moving expense reimbursements paid by an employer.

Under the TCJA, the deduction and related exclusion for qualified moving expense reimbursements is eliminated for most taxpayers. There is a limited exception for active military. In addition, to the extent an employer reimburses an employee for moving expenses, that reimbursement is treated as taxable compensation.  Note however, if a taxpayer moved in 2017 but was reimbursed by their employer in 2018, there is no tax on such reimbursement.

The Takeaway

To account for the changes discussed above, companies need to review their benefit programs and evaluate their internal accounting procedures for these expenditures. Where items are no longer deductible or where the deduction is limited, adjustments will be required to compute taxable income. Consideration should be given to the treatment of fringe benefits under state and local laws as well.