Tax Cuts and Jobs Act: Tactical Decisions Remain for Employers
posted Nov 19, 2018 by Loree Dubois, CPA in the Global Tax Blog
Although most provisions of the Tax Cuts and Jobs Act (TCJA) took effect at the beginning of 2018 and payroll tax withholding adjustments were made months ago, many employers still face important policy decisions necessitated by changes to the tax law. In addition to complying with the TCJA, employers need to decide whether to take advantage of new opportunities and offset the loss of certain tax incentives in the employee benefits arena.
Paid Family and Medical Leave Tax Subsidy
On the positive side, employers have the opportunity — at least through 2019, if it’s not extended — to receive tax credits if they provide some compensation to employees while they take leave under the Family and Medical Leave Act (FMLA).
Under the TCJA, employers can take a 12.5% federal tax credit on wages paid during leave if the pay equals half of their normal pay. The credit increases by 1% for every 1% of FMLA leave pay above 50%, subject to a 25% cap. In other words, if you paid an employee on FMLA leave 62.5% of his or her prior wage, you can take a 25% tax credit. By doing so, the after-tax cost of providing those wages would be 37.5% (62.5% – 25%).
How does that translate into dollars? The after-tax cost of paying an employee $625 per month during his or her leave would be only $375 (assuming the employee normally earns $1,000 a month). This doesn’t factor in state and local tax savings that might also be available if state and local taxes are based on your federal tax base.
However, this tax credit is currently scheduled to end after 2019, and it’s subject to various rules and restrictions. If the credit isn’t extended, it might be difficult from an employee relations perspective for employers to drop this benefit.
Another new opportunity under the TCJA for privately held employers pertains to awards of stock options and restricted stock units (RSUs). Currently, when such awards are granted or vested, the value of the award becomes taxable income for the recipient.
Unless the company has a plan in place to buy back the stock, the awards may create a cash flow issue for employees who owe taxes on noncash stock-based awards. That’s not an issue for employees of public companies because there’s a ready market for shares of publicly traded stock.
Under the TCJA, employees who receive stock-based compensation can postpone paying tax on the awards for up to five years (or earlier if a liquidity mechanism is established).
Some strings are attached to this new opportunity, however. First, it isn’t available to the company’s CEO, CFO or the four highest paid corporate officers. It’s also unavailable to employees who own at least 1% of the company.
Another restriction is that at least 80% of the company’s U.S. employees must be granted qualified stock with similar features. Additionally, the amount of stock awarded must be more than a “de minimis” amount.
This new tax deferral opportunity, by itself, probably won’t motivate employers to start a stock option or RSU program. But it could motivate those who had been thinking about starting a plan and were on the fence to move ahead.
The TCJA also contains some provisions that are unfavorable to employers. Lost tax incentives for employee benefits include:
Commuting transportation subsidies. Under prior law, employers could deduct amounts paid to employees to encourage them to use carpools and mass transit, as well as parking near the work premises. Under the TCJA, those expenses are no longer deductible starting in 2018.
Eating facilities and meals. Under prior law, you could deduct costs associated with a cafeteria on or near your workplace, if the operating expenses were offset by what employees paid for food. In addition, you could deduct the costs of giving employees “de minimis” amounts of food without charge ― for example, to make it easier for employees to work overtime.
Starting in 2018, you can only deduct 50% of the costs of eating facilities and meals for employees. Starting in 2026, the deduction for these benefits is eliminated. However, the costs of food served at company picnics and holiday parties are still deductible, if certain conditions are met.
Moving expenses. Under prior law, payments to employees (directly or indirectly) to cover job-related moving expenses were excluded from employees’ taxable income. Under the TCJA, from 2018 through 2025, these payments are taxable income to employees. Some employers may decide to “gross up” moving expense reimbursements (pay employees an extra amount) to offset the tax liability they’ll now face when they relocate for work.
In addition, the IRS recently issued guidance that will allow employees to exclude from taxable income job-related moving expenses that were paid (directly or indirectly) by employers in 2018 for expenses incurred (but unreimbursed) in 2017. The guidance also explains how employers that have already withheld federal employment taxes on the reimbursement of a 2017 move can seek an adjustment or refund for overpayment.
What’s Your Game Plan for 2019?
It’s almost time for your employees to sign up for their 2019 benefits. Have you adjusted your offerings to account for the tax law changes? Our tax professionals can help you understand the TCJA provisions that will affect you and your employees — and recommend ways to maximize the potential upsides for everyone.
The TCJA…So Many Changes, So Many Questions…we can help you navigate this huge tax overhaul! Visit our Tax Reform Center for everything you and your business need to know, now.