Tech Companies: Let’s Review Your Compensation Plan under New Tax Law
posted Oct 2, 2018 by Paul Oliveira, CPA in the Global Tax Blog
The tech industry was built on the sweat equity of its talented workforce, so it’s become synonymous with offering creative fringe benefits — including catered meals, company outings, generous benefits packages and performance-based awards. But certain compensation-related deductions may be eliminated or reduced under the Tax Cuts and Jobs Act (TCJA).
Here’s what changed and why it’s important to evaluate your company’s compensation plan in light of those changes.
Meals and Entertainment
Do you provide meals for your employees? If so, amounts paid or incurred in 2018 and beyond may be only 50% deductible if they fall under these categories:
De minimis meals. Under prior law, employers could deduct 100% of the cost of food and beverages supplied to employees, if the food and beverages were tax-free to employees because they qualified as a de minimis fringe benefit. Those benefits are defined as having a value and frequency of occurrence so small as to make accounting for them unreasonable or administratively impractical. Under the new law, these costs will be only 50% deductible.
Meals provided for the employer’s convenience. Under prior law, if certain requirements were met, employers could deduct 100% of the cost of meals furnished to employees for the convenience of the employer. Under the new law, employers can deduct only 50% of the cost of meals that are provided for their convenience in 2018 through 2025. Starting in 2026, no deductions for these costs will be allowed.
Employer-operated eating facilities. Under prior law, employers could deduct 100% of the cost of operating a company cafeteria or other “qualified eating facility” for employees. Eligible facilities must be:
- Owned or leased by the employer,
- Operated by the employer (directly or through a contract with a vendor), and
- On or near the employer’s business premises.
In addition, revenue from the facility had to equal or exceed the cost of operating the facility. Meals also had to be served during or immediately before or after the employees’ workday and the facility generally had to be available to all employees.
Under the new law, employers can deduct only 50% of the cost of operating a qualified eating facility for employees through December 31, 2025. Starting in 2026, no deductions will be allowed for these costs.
While the costs of business-related meals for customers are still 50% deductible under both the old and new law, deductions for entertaining customers — such as the cost of sporting event tickets, theater box seats or golf outing dues — are disallowed under the TCJA.
But there’s one silver lining to the meals and entertainment provisions: The new law preserves the deductions for employee events, including company holiday parties and company picnics. You can deduct the cost of both meals and entertainment at these events, if certain requirements are met.
Other Fringe Benefits
Many tech companies struggle to attract and retain skilled workers. Compensation packages can be a differentiating factor for current and prospective employees. But the after-tax cost of providing certain benefits is increasing under the TCJA.
Starting in 2018, the new tax law eliminates certain reimbursement program deductions and income exclusions, including:
Transportation fringes. Employers can no longer deduct the cost of qualified employee transportation fringe benefits (for example, parking allowances, mass transit passes and van pooling). Companies also can’t deduct the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety.
Relocation packages. Employers can no longer deduct pay or reimburse an employee’s moving expenses on a tax-free basis. Starting in 2018, reimbursed employee moving expenses are includable in W-2 wages and deductible as a compensation expense. Employees can’t claim an above-the-line deduction for moving expenses for 2018 and beyond.
The TCJA also restricts the types of employee achievement awards that employers can deduct (and employees can exclude from taxable income). Nondeductible award categories now include:
- Cash and cash equivalents (such as gift cards and coupons),
- Meals and lodging,
- Tickets to theater or sporting events, and
- Stocks and bonds.
Again, there’s a silver lining to the fringe benefit provisions of the new tax law: The TCJA establishes a new tax credit for employer-paid family and medical leave through 2019. This change benefits employers that pay employees — though not necessarily their full salaries — when they’re absent due to their own sickness or that of a family member. Depending on the demographics and preferences of your workforce, this benefit may be a valuable add-on to your existing benefits plan that could also potentially lower your taxes.
When updating your company’s compensation plans, taxes are just one consideration. It’s important for tech companies to evaluate their plans on a regular basis and survey workers to identify which perks they value most. In some cases, companies may decide to discontinue certain benefits and allocate more funds toward preferred benefit alternatives.
Our tax professionals are on top of the latest developments and can help you comply with the new law, as well as brainstorm ways to customize your compensation plan to minimize any adverse tax consequences.
For more tax reform updates, be sure to visit our Tax Reform Center- your “one stop shop” for all things Tax Cuts and Jobs Act (TCJA) related.