The Tax Cuts and Jobs Act included a number of changes to the previous tax code, particularly in relation to employee benefits. Beginning January 1, 2018, several changes in the taxability and deductibility of employee fringe benefits were implemented. Put simply, employer payment or reimbursement of an employee’s business expenses, or “working condition fringe benefits,” as they may be called, will continue to be tax-free to the employee and tax deductible to the employer with the exception of certain, somewhat arbitrary, fringe benefits that will no longer be tax deductible by the employer. However, if an employer decides to provide these affected benefits to the employee on a taxable basis (i.e. as W-2 wages), the employer will be able to claim a tax deduction for the benefits.
While employees could deduct unreimbursed employee business expenses as a miscellaneous itemized deduction prior to the Act, under the new law, miscellaneous itemized deductions are no longer allowed. If an employer reimburses an employee for a business expense, the reimbursement will remain tax free to the employee; however, if the employer does not choose to do so, a deduction is no longer able to be claimed by the employee for the expense.
In addition, whereas individuals could claim above-the-line (in other words, non-itemized) deductions for moving expenses paid in connection when starting work at a new primary place of work or be reimbursed by the employer for moving expenses as a tax-free benefit, under the Act, neither of these options is longer available. However, the employee can deduct payment or reimbursement for moving expenses, when treated as W-2 wages, as a compensation expense.
In terms of transportation benefits, “qualified transportation fringe benefits” can be defined as transportation in a commuter highway vehicle for travel between the employee’s residence and place of employment, transit passes, qualified parking, and, prior to the Act, qualified bicycle commuting reimbursement. While under the Act qualified bicycle reimbursements can no longer be provided tax free, employers can continue to provide the other benefits on a tax-free basis to their employees. However, the employer cannot deduct the expenses for providing these fringe benefits. But, like many of the other fringe benefits included in the Act, if the employer treats the transportation benefits as taxable W-2 wages to the employee, the employer can deduct the expenses of providing the benefits. In general, the employer cannot deduct any expense incurred for providing transportation to an employee of the taxpayer except as necessary for the employee’s safety, and commuting expenses are treated as taxable to the employee.
The Act also stipulates that an employer cannot claim a tax deduction for entertainment, recreation, or amusement expenses and prohibits the deduction of fees for membership for any club organized for business, pleasure, recreation, or social purpose. A major difference from the prior law is that under the new Act, it doesn’t matter whether the expense is directly related or associated with the active conduct of the employer’s business.
While the Act does not change the previous rules for determining whether meals provided to an employee at an employer-operated eating facility can be treated as tax free to the employee (as provided under Section 132 (e)(2) and Section 119), it does impose a 50% limit on deductions of such expenses. After Dec. 31, 2025, such expenses will be fully nondeductible.
Finally, employers are permitted to make a tax-free award of tangible personal property to an employee for length-of-service or safety achievement subject to certain conditions and dollar limits. Cash, cash equivalents, gift cards, gift coupons, or gift certificates, in addition to vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items are not considered to fall under the definition of “tangible personal property.”
In conclusion, employers and employees both should review the changes to the employee fringe benefits under the new Tax Act to be sure that they are adhering to the regulations, many of which are different than before.
For help navigating changes under the Act, reach out to us at Sousa & Weber. We’ll clarify the changes and make it easy for you to manage your deductions with ease.