What Employers Need To Prepare For After The Tax Cuts & Jobs Act

ARTICLE HIGHLIGHTS:

• Entertainment expenses
• Family & medical leave
• Payroll related changes w.r.t qualified bicycle commuting expenses
• Eating facilities & De-minimis meals
• Senior employee compensation

On 22^nd December 2017 Donald Trump, President of USA signed into law the Tax Cuts & Jobs Act (TCJA). The TCJA made several changes in provisions relating to employers and the various perquisites/benefits they provide to employees.

(1) ENTERTAINMENT EXPENSES:

Introduction – Prior to the enactment of TCJA, IRC Section 274 disallowed deductions for entertainment expenses, and expenses relating to amusement/recreation unless the said expense is directly related to or associated with the taxpayer’s business. Expenses such as Food & beverages given to employees on business premises, expenses treated as compensation, reimbursed expenses, recreational expenses for employees, employees/stockholders business meetings were allowed a 50% deduction.

After the new Tax Law has come into force, all entertainment expenses are Disallowed, even if directly related to the business. The 50% deduction now applies only to Meals. However, there remains some confusion regarding the thin red line which distinguishes between Meals & Entertainment.

Steps to be taken by employers –  From the current tax year onwards, businesses shall have to rework their strategy regarding entertainment expenses and they shall have to change their General Ledgers to create separate accounts for –

• Fringe benefits which meet the requirements of IRC Section 132 where a 100% deduction is allowed – For example, a movie ticket purchased by the employer & given free of cost to an employee
• Expenses where a deduction is not allowed – For example, club expenses
• Meal expenses incurred where 50% deduction is allowed

(2) FAMILY & MEDICAL LEAVE:

Introduction – As per IRC Section 45S, the employer credit for paid family and medical leave is a general business credit which employers may claim, based on wages paid to qualifying employees while they are on family and medical leave, subject to certain conditions. To claim this credit, employers must have a written policy in place that meets certain requirements, including providing:

• At least two weeks of paid family and medical leave (annually) to all qualifying employees who work full time (prorated for employees who work part time) and
• The paid leave is not less than 50 percent of the wages normally paid to the employee.

The credit is calculated as a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year.  The minimum percentage is 12.5% and is increased by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages, with a maximum of 25%.  This credit is generally effective for wages paid in taxable years of the employer beginning after December 31, 2017, and it is not available for wages paid in taxable years beginning after December 31, 2019.

Steps to be taken by employers – After the enactment of the TCJA, businesses may have to modify the paid-leave policies of their employees. Also, different codes would have to be used for various types of paid leaves for employees.

(3) PAYROLL RELATED CHANGES W.R.T QUALIFIED BICYCLE COMMUTING EXPENSES

Introduction – IRC Section 132(f) defines “qualified bicycle commuting reimbursement” with respect to any calendar year as any employer reimbursement during the 15-month period beginning with the first day of such calendar year for reasonable expenses incurred by the employee during such calendar year for the purchase of a bicycle and bicycle improvements, repair, and storage, if such bicycle is regularly used for travel between the employee’s residence and place of employment.

Earlier, an exclusion from wages for Federal Income tax, FICA and FUTA applies to Qualified bicycle commuting expenses of upto $20 per month during which the employee regularly uses his bicycle for travel between home and work.

After the enactment of TCJA, bicycle commuting expenses received by employees are included in wages subjected to Federal Income tax, FICA and FUTA.

Steps to be taken by employers – Employers will need to change their payroll systems to incorporate changes relating to qualified bicycle commuting reimbursement. Employers may also have to conform to withholding requirements for states which have updated their tax laws with changes to the IRC

(4) EATING FACILITIES & DE-MINIMIS MEALS –

Introduction – Earlier, a 100% deduction was allowed for De Minimis meal expenses incurred by the employer.

The TCJA made some changes effective 1^st January 2018 to limit the deduction to 50% for

• De minimis meals under IRC Section 132(e)(1) &
• Meals provided to employees for the convenience of the employer at or near the business premises of the employer under Section 132(e)(2)

The TCJA further provided that effective 1^st January 2026, no deduction shall be allowed for any meal related expense under IRC Section 119(a) or any expense for operation of eating facility for employees or any expenses incurred on Food & beverages

Steps to be taken by employers – As the deduction for free meals to employees is now limited to 50% (and later reduced to Nil from 1^st January 2026 onwards), employers shall have to evaluate the loss of tax deduction.

(5) SENIOR EMPLOYEE COMPENSATION –

Introduction – Earlier, IRC Section 162(m) set an annual limit of $1mn for the tax deduction that may be taken by a public company for compensation paid to the CEO and next three highest paid officers (excluding the CFO of the company).  IRC section 162(m) however, provided for the following exceptions, which provided ways for still claiming deduction for executive compensation beyond $1mn –

• Performance based compensation, which included cash compensation & stock options contingent upon the attainment of set objectives was fully deductible.
• Severance & other deferred payments to individuals who were no longer covered employees were beyond the scope of the $1mn limit
• Commissions paid which was fully deductible.

The TCJA makes some changes to the tax laws regarding executive compensation & eliminates all the exceptions. Hence, now all compensation paid in excess of $1mn paid to any covered employee or employee who was previously a covered employee is not deductible by the company in computing its taxable income.

However, the TCJA has provided for a transition provision whereby Compensation payable pursuant to a legally binding agreement that was in place prior to November 2, 2017, continues to be subject to the exceptions of IRC Section 162(m) as it was in effect prior to the Act

Steps to be taken by employers – The changes made by TCJA reduce the biases for deferred compensation, performance bonuses and stock option. Companies will have to evaluate their pay packages for senior employees. Proper disclosures would be required for intimating the non-deductibility of amounts that were previously deductible under one of the exemptions of IRC Section 162(m)