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PSCA Executive Reports

January 31, 2018

Fringe Benefits Provisions in Tax Reform.

1. Employers May No Longer Deduct Qualified Transportation Fringe Benefits and Certain Other Commuting Expenses

  • Prior Law – Employers could generally deduct expenses for providing a qualified transportation fringe benefit. Qualified transportation fringe benefits are the provision of (or reimbursements or payments for) transportation in a commuter highway vehicle, transit passes, qualified parking, and qualified bicycle commuting reimbursements. 
  • What Changed – Employers may no longer deduct: (1) any expenses incurred in providing, paying, or reimbursing qualified transportation fringe benefits; or (2) any expenses for providing transportation for an employee to commute between his or her residence and place of employment, except as necessary for ensuring the employee’s safety.  Employers may continue to deduct qualified bicycle commuting reimbursements for eight years. 
  • What Did Not Change - Congress eliminated the employer deduction by amending Code Section    274(a)(4).  No change was made to Code Section 132(f).  As a result, the Act does not affect the ability of employees to pay for mass-transit and parking benefits through elective deferrals of salary.  However, bicycle commuting expenses are ineligible for salary deferrals under Code Section 132(f)(4).    
  • When – Beginning in 2018, except for qualified bicycle commuting reimbursements, which are non-deductible beginning in 2026.

2. Tax-Exempt Employers Must Include Certain Fringe Benefits in Unrelated Business Taxable Income

  • Prior Law – Employers exempt under Code section 501(c) are subject to tax on unrelated business taxable income (“UBTI”), which generally means income derived from an unrelated trade or business regularly carried on by the employer that is not substantially related to the employer’s exempt purpose.  Fringe benefits provided by such employers would not constitute UBTI.
  • What Changed – To provide parity with taxable employers, the definition of UBTI now includes the value of qualified transportation fringe benefits, any parking facility used in connection with qualified parking benefits, and on-premises athletic facilities if such benefits would not be deductible by a taxable employer. 
  • When – Beginning in 2018.

3. Employees Cannot Exclude Qualified Bicycle Commuting Reimbursements

  • Prior Law – Employees could exclude from income the value of qualified transportation fringe benefits provided by his or her employer for qualified bicycle commuting reimbursements, up to certain monthly limits set forth by the IRS (for 2017, up to $20 per month).
  • What Changed – Employees may not exclude any qualified bicycle commuting reimbursements from their income. 
  • When – 2018-2025.  Beginning with the 2026 tax year, qualified bicycle commuting reimbursements will again be excludible from employees’ income, but will no longer be deductible by employers.

4. Employees Cannot Exclude or Deduct Qualified Moving Expense Reimbursements

  • Prior Law – Employees could exclude from income the value of any qualified moving expense received as a payment or reimbursement. In addition, employees generally could deduct unreimbursed qualified moving expenses as itemized deductions, subject to certain limits.
  • What Changed – Employees may not exclude from income the value of any qualified moving expense reimbursements or payments and these amounts are treated as taxable supplemental wages. In addition, employees may not deduct any unreimbursed qualified moving expenses. 
  • When – 2018-2025.  Beginning with the 2026 tax year, employees can again exclude qualified moving expense reimbursements from income or deduct unreimbursed qualified moving expenses).

5. Codifies Definition of Items that Qualify for the Employee Achievement Award Deduction

  • Prior Law – Employers could deduct the cost of employee achievement awards, subject to certain limits, and employees may exclude such awards from income. Employee achievement awards are items of tangible personal property given to an employee in recognition of length of service or safety achievement, that are presented as part of a meaningful presentation, and that meet other requirements. “Tangible personal property” was not defined in the statute, but proposed IRS regulations defined it to exclude cash or certain certificates, vacations, meals, lodging, theater and sporting event tickets, stocks, bonds, and other securities.
  • What Changed – Codifies a definition of “tangible personal property” similar to the definition in the proposed IRS regulations. The statutory definition excludes cash, cash equivalents, gift cards, coupons, gift certificates (with certain limitations), vacations, meals, lodging, theater or sporting event tickets, stocks, bonds, other securities, and other similar items.
  • When – Beginning in 2018.

6. Employers Generally Cannot Deduct Entertainment, Amusement, and Recreation Expenses (with Limited Exceptions for Employee Meals)

  • Prior Law – Employers could deduct 50% of expenses for: (1) entertainment, amusement, recreation; (2) membership dues for clubs organized for business, pleasure, recreation or any other social purpose; and (3) a facility or portion of a facility used for a purpose in (1) or (2), but only if the expenses directly relate to the conduct of the employer’s trade or business. There were certain exceptions that allowed an employer to deduct 100% of the expenses, however, such as if the employer included the value of the expense in the employee’s income.
    In addition, employers could deduct 50% of the food and beverage expenses associated with their trade or business (e.g., meals consumed by employees on work travel) and 100% of the expenses related to providing food and beverages to employees that meet the de minimis fringe benefit requirements.
  • What Changed – Employers generally may not deduct expenses for: (1) entertainment, amusement, recreation; (2) membership dues for clubs organized for business, pleasure or any other social purpose; and (3) a facility or a portion of facility used for (1) or (2). The exceptions to the deduction limitations, such as where the employer includes the value of the expense in the employee’s income, are retained. Employers may continue to deduct 50% of food and beverage expenses associated with their trade or business.
    Employers may also deduct 50% of expenses related to providing food and beverages on-premises that meets the requirements for de minimis fringe benefits or is for the convenience of the employer.
  • When – Beginning in 2018 (expenses for on-premises meals are non-deductible beginning in 2026).

7. Employees Cannot Deduct Unreimbursed Trade or Business Expenses

  • Prior Law – Employees could generally take an itemized deduction for unreimbursed trade or business expenses, subject to certain limitations. 
  • What Changed – Employees can no longer take an itemized deduction for unreimbursed trade or business expenses. This may result in groups of workers being treated differently because independent contractors can generally still deduct trade or business expenses.
  • When – 2018 – 2025 (beginning with the 2026 tax year, employees can again take an itemized deduction for unreimbursed trade or business expenses, subject to certain limitations).

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