Fringe benefits still largely intact after tax reform
While it is true that fringe benefits were scratched by tax reform, the bleeding is relatively minor. Despite the level of damage, employers likely need to change some processes or reporting to comply and may also consider now a good time to do an employment tax check-up while the changes are being reviewed. Here is a high level summary of what changed and what did not change.
Items that changed:
- Employers lose deductions for expenses incurred in providing qualified transportation fringe benefits. They are also denied any deductions for any employee commuting expenses unless necessary for safety purposes.
- Employees are taxed on moving expenses paid or reimbursed by their employers, and they lose the miscellaneous itemized deduction for those costs not being reimbursed as well.
- Employers lose some deductions for food and beverages provided to the employees through an eating facility at or near the employer’s business premises, including the costs of meals furnished for the convenience of the employer.
- Qualified bicycle reimbursements are taxable income to employees.
Notice that only two items that were previously excluded became taxable to employees – moving expenses and qualified bicycle reimbursements. The other changes affect the employer only, while the benefits remain tax-free to employees; plus, there are many tax-free benefits that were not even addressed in the new law. The following list showing what did not change is much more significant.
Items that did not change:
- Meals and entertainment provided to employees in many, but not all, circumstances will meet an exception to be excluded from an employee’s income.
- Employee achievement awards were clarified, not changed. The items added to statutory language were already excluded from the definition in proposed regulations.
- Employers may reimburse employees for trade or business expenses and deduct those expenses while treating them as a working condition fringe and, thus, not creating taxable income to employees.
- Retirement plans, healthcare, cafeteria plans, and a multitude of other employee benefits were unchanged.
Again, despite the short list of changes, many employers offer benefits that are on the first list so processes and tracking will need to be reviewed to assess the effects, determine whether changes will be made to benefits, and properly report items in future periods. The IRS seems to be increasing its scrutiny of fringe benefits during employment tax audits so while assessing these changes, now may be a good time to review the overall benefit package for proper treatment to eliminate the risk of taxes, penalties, and interest from underreporting compensation.