With the House and Senate now beginning reconciliation of their respective bills, no one knows the outcome. But so far, in exchange for providing significantly lower tax rates for corporations, the House and Senate bills eliminate deductions affecting the incentive, rewards and benefits business. According to reports published by the law firm McDermott, Will and Emery and the New York Times, the two bills have several provisions that will affect deductibility of employee benefits:
1. Removal of exclusions for employee awards. According to the law firm, the hard-fought inclusion of deductions for safety and qualified service awards by the Incentive Federation could go away. “Code Sections 132 and 274(j) allow employers to provide different types of employee achievement awards on a tax-free basis. This exclusion applies to the value of any tangible personal property given to an employee as an award for either length of service or safety achievement—e.g., the traditional ‘gold watch’ award for service. The exclusion does not apply to awards of cash, cash equivalents, gift certificates or other intangible property such as vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds and other securities. The amount of the exclusion is $1,600 ($400 for awards that are not ‘qualified plan awards’) per employee annually. The House Bill would repeal this tax-free benefit effective as of Jan. 1, 2018. The Senate Bill does not address employee achievement awards.”
McDermott, Will and Emory (MW&E) advises that “if the House Bill passes, employers may wish to provide more de minimis in-kind benefits to recognize employees’ performance; however, such benefits must be very low in value to qualify for this exclusion.”
2. Business entertainment. The ability to deduct half of the cost of taking a client out after a business meeting could go away. According to MW&E’s analysis, “Business travel meals that are not ‘entertainment’ would remain subject to the existing 50 percent disallowance. This means that taxpayers will need to carefully review all expenses to determine whether they are business entertainment expenses or business travel expenses.”
3. Holiday parties, picnics and other entertainment activity. Based on final reconciliation, only “food and beverages provided on the premises of the employer” would be deductible.
4. Other fringe benefits. MW&E says that it’s likely that expenses for “athletic facilities, club memberships and personal amenities not related to the employer’s trade or business would also be 100 percent disallowed” under most circumstances, along with commuting or parking benefits. On the other hand, the deductibility for “non-meal entertainment expenses associated with certain employee meetings, stockholder meetings and meetings of business leagues would be 100 percent deductible. The related meal expenses would be subject to the 50 percent business meals disallowance, unless the de minimis exception applies.”
5. Gift cards. According to the New York Times, “the Senate bill prohibits employers from rewarding employees with gift cards so that a reward of $25 or $50 in the form of a gift card doesn’t escape being taxed.”