Melissa Ostrower, Esq. Jackson Lewis P.C. New York City (212) Jackson Lewis P.C.

Transcription

1 Overview of Selected Tax and Benefits Law Changes nder the Tax Cts and Jobs Act ( Act ) Legal Qick Hits for ACC s Employment and Labor Law Committee March 2018 Melissa Ostrower, Esq Jackson Lewis P.C. New York City ostrowerm@jacksonlewis.com (212) Jackson Lewis P.C.

2 Changes to Employer Dedction Rles Changes to Employer Dedction Rles Payments made in settlement of claims or sits arising ot of the employer-employee relationship are tax dedctible by an employer nless the payment is specifically listed as nondedctible in the Internal Revene Code. Prior to the Act, Section 162 of the Code provided that only the following types of payments were nondedctible: Any pnitive fine or similar penalty paid to a government for the violation of any law; Any illegal payment, bribe, kickback, or rebate when made nder any of the circmstances or to or by any of the persons described in the Code; and A portion of treble damage payments nder the antitrst laws.

3 Limitations on Dedctions Added by the Act The Act adds two limitations to the tax dedctibility of payments that can apply in the employer-employee context. In particlar, the Act adds the following types of payments as nondedctible: Any settlement or payment related to sexal harassment or sexal abse and attorney fees related to sch settlement or payment IF the settlement is sbject to a nondisclosre agreement. Any amont paid at the direction of a governmental entity in connection with the violation of any law or the investigation or inqiry by the governmental entity into a potential violation of law OTHER THAN amonts paid as restittion for damages or paid to come into compliance with the law.

4 Excise Tax on Excess Compensation and Excess Parachte Payments Paid by Tax-Exempt Employers Under the Act, starting in 2018, tax-exempt organizations are sbject to a 21% excise tax on: Remneration exceeding $1 million paid to a covered employee in a tax year, and Any excess parachte payment paid to a covered employee. Covered employee incldes any active or former employee who is one of the 5 highest compensated employees of the organization for the crrent tax year, or was a covered employee in any prior year beginning in 2017 (so that the covered employee stats persists into sbseqent years).

5 Excise Tax Contined Excess parachte payments generally refers to compensatory parachte payments that are contingent on a covered employee s separation from employment and exceed the employee s 5-year average annal compensation, provided that the aggregate parachte payments exceed 3 times this amont. This definition is sbject to some exceptions, inclding exceptions for payments made to individals who are not highly compensated employees nder Code Section 414 (q) and payments for services performed by a licensed medical professional. Remneration is considered to be paid when the covered employee s right to sch remneration is not sbject to a sbstantial risk of forfeitre, so deferred compensation may fall within the scope of these rles before it is actally paid to the covered employee. This excise tax, if applicable, is payable by the tax-exempt employer and not by the covered employee. The Act does not provide for any grandfathering of existing compensation arrangements or any transition period.

6 Repeal of Performance-Based Compensation Exclsion An employer generally may dedct reasonable compensation for personal services as an ordinary and necessary bsiness expense, however, Section 162(m) limits the dedctibility of compensation paid to a covered employee of a pblicly held corporation to no more than $1 million per year. Prior to the Act, there was an exception to this rle permitting the dedction of compensation in excess of $1 million in certain cases, inclding where the compensation was performance-based within the meaning of Section 162(m). The Act eliminates this exception. In addition, the Act expands the definition of pblicly held corporation for prposes of the $1 million limitation to inclde additional secrities registrants and has expanded the definition of covered employee to inclde an employer s chief financial officer and any individal who was previosly a covered employee (so that the dedctibility limitation contines to apply to payments made to former covered employees or their estates, even after their death). The Act contains a transition rle that exempts from these changes remneration provided prsant to a written binding contract that was in effect on November 2, 2017 and that was not modified in any material respect on or after sch date.

7 Paid Family Leave Tax Credit New section 45S of the Internal Revene Code provides a tax credit for 2018 and 2019 to employers who volntarily offer p to twelve weeks of paid family and medical leave annally to qalifying employees prsant to a written policy. To enjoy the tax credit, the leave benefit mst be at least 50% of the employee s normal pay. The amont of the tax credit is 12.5% if the leave benefit amont eqals 50% of normal pay. The 12.5% credit increases incrementally (p to a maximm of 25%) to the extent the leave benefit exceeds 50% of normal pay. A qalifying employee is one who has been employed by the employer for at least a year and who is paid no more than 60% of the highly compensated employee dollar amont on an annal basis (i.e., $72,000 for 2018).

8 Fringe Benefit Changes Unreimbrsed Bsiness Expenses Prior to the Act, an employee who itemized tax dedctions cold dedct nreimbrsed employee bsiness expenses as a miscellaneos itemized dedction (to the extent that the aggregate miscellaneos itemized dedctions exceeded 2% of the employee s adjsted gross income). Beginning Janary 1, 2018, miscellaneos itemized dedctions are no longer allowed. As a reslt, where an employer does not reimbrse an employee s bsiness expense, the employee cannot claim a tax dedction for the expense.

9 Fringe Benefit Changes Moving Expenses Prior to the Act, an individal cold claim an above-theline dedction (a non-itemized dedction) for moving expenses paid in connection with commencement of work at a new principal place of work. Alternatively, an employer cold pay or reimbrse an employee for moving expenses as a tax-free fringe benefit. Beginning in 2018, an employee can no longer dedct moving expenses nor can an employer pay or reimbrse an employee s moving expenses on a tax-free basis.

10 Fringe Benefit Changes Qalified Transportation Benefits Prior to the Act, the vale of a qalified transportation fringe benefit provided by an employer to an employee was treated as tax-free, sbject to monthly limits. A qalified transportation fringe is defined as: transportation in a commter highway vehicle for travel between the employee s residence and place of employment; transit passes; qalified parking; and qalified bicycle commting reimbrsement. Employers can still provide tax-free qalified transportation fringe benefits to employees (althogh qalified bicycle commting reimbrsements cannot be provided tax-free), however, an employer cannot dedct the expenses for providing tax-free transportation fringe benefits. On the other hand, if an employer treats the transportation fringe benefits as taxable W-2 wages to the employee, the employer can dedct the expenses of providing those benefits.

11 Expenses for Employer-Operated Eating Facilities Only 50% Dedctible The Act does not change the rles for determining whether the vale of meals provided to an employee at employer-operated eating facility can be treated as tax-free to the employee. Section 132(e)(2) provides that the vale of the meals can be taxfree if: (1) the facility is located on or near the employer s bsiness premises, (2) the facility s annal revene eqals or exceeds its direct operating costs; and (3) for highly compensated employees, the facility is operated withot discriminating in favor of sch employees. Section 119 provides the vale of meals frnished to an employee can be tax-free if: the meals are provided on the employer s bsiness premises and are provided for the convenience of the employer. However, the Act now imposes a 50% limit on dedcting food or beverage expenses to employees at an employer-operated eating facility. These expenses are made flly nondedctible after Dec. 31, 2025.

12 Definition of Tangible Personal Property for Tax- Free Employee Achievement Awards The Code permits an employer to make a tax-free award of tangible personal property to an employee for length-ofservice or safety achievement sbject to certain conditions and dollar limits. The Act codifies the definition of tangible personal property (based on the proposed reglations issed in 1989) to state that tangible personal property does not inclde: cash, cash eqivalents, gift cards, gift copons, or gift certificates; or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other secrities, and other similar items. However, arrangements that confer only the right to select and receive tangible personal property from a limited array of items pre-selected or pre-approved by the employer qalify as tangible personal property.

13 Entertainment Expenses The Act provides that an employer cannot claim a tax dedction for entertainment, amsement or recreation expenses or with respect to any facility sed in connection with sch activity. The Act also prohibits any dedction for amonts paid for membership in any clb organized for bsiness, pleasre, recreation or social prpose. In contrast to prior law, it does not matter whether the expense is directly related to or associated with the active condct of the employer s trade or bsiness. Note that an employer can still flly dedct expenses for goods, services or facilities that are treated as W-2 wages to the employee. In addition, an employer can flly dedct expenses paid to reimbrse an employee nder a reimbrsement or other expense allowance arrangement that can be treated as taxfree to the employee nder the accontable plan rles.

14 Repeal of Individal Mandate The Act eliminates the Affordable Care Act s individal mandate, effective The employer mandate and reporting reqirements remain in effect.

15 IRS Notice 1036 Withholding on spplemental wages when an employee receives $1 million or less of spplemental wages dring the calendar year Flat Rate is now 22%. Withholding on spplemental wages when an employee receives more than $1 million of spplemental wages dring the calendar year - If a spplemental wage payment, together with other spplemental wage payments made to the employee dring the calendar year, exceeds $1 million, the excess is sbject to withholding at 37% (or the highest rate of income tax for the year), withot regard to the employee s Form W-4.

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