Learning these changes from an expert will benefit business owners next tax season.
For businesses, the rubber is now meeting the road on the tax law passed by Congress in late December of 2017 under the Tax Cuts and Jobs Act of 2017 (TCJA). It’s the most massive tax law change since 1986, and there’s a lot to take in. There are numerous changes that employers must make to their processes and accounting in the areas of income tax withholding, family and medical leave, moving expenses and entertainment deductions, among others. Here’s a summary of those changes:
Federal income tax withholding — special rules **NOTE CHANGE**
“The supplemental tax rate decreased from 25% to 22% in 2018.“ TCJA called for 28%, but the IRS has stated that they will accept the 3rd individual tax bracket, which is 22%. When originally written, the IRS had not come out with their interpretation. For reference, visit https://www.irs.gov/pub/irs-pdf/n1036.pdf and look at the bottom left paragraph on page 2.
With the new law, supplemental pay withholding increased from 25 percent to 28 percent. Supplemental withholding for employees with year-to-date supplemental wages in excess of $1 million dropped from 39.6 percent to 37 percent. Backup withholding for 1099 forms without an EIN is now 24 percent; it was previously 28 percent.
Moving expense reimbursements
Before the new law passed, moving expenses were excludable from employees’ income. With the new law, all moving expenses paid by the employer are taxable income to the employee — except for members of the military following a military order for permanent change of station. The result? Employers now have payroll tax obligations for moving costs (other than the above-mentioned military moves).
2/12/19: Are you an employer that reimburses employees’ moving expenses? The IRS has created a set of Frequently Asked Questions (FAQs) about the tax implications of moving expenses for the 2018 tax year. The FAQs clarify that reimbursements and payments made in 2018 for qualified moving expenses incurred in 2017 may be excluded from an employee’s income in 2018. However, starting after 12/31/17 and before 1/1/26, the Tax Cuts and Jobs Act has suspended the tax-free exclusion. Read the FAQs.
In IRS Notice 2018-75, the IRS announced that employer reimbursements in 2018 for qualifying pre-2018 employee moves are tax-free. Because the TCJA was passed at the end of 2017, individuals who relocated in 2017 but didn’t receive payment until 2018 wouldn’t have anticipated that the payments were taxable. The IRS states that employer payments in 2018 for employee moving expenses incurred prior to 2018 are excluded from the employee’s wages for tax purposes.
The Family and Medical Leave Act
Employers may want to consider modifying their paid-leave policies, due to changes in the Family and Medical Leave Act. Before the new law passed in December 2017, the FMLA stated that employees must be allowed 12 weeks of time off for family- and medical-related reasons, with no requirement that they are paid. The new law, however, stipulates that if eligible employees are paid while on FMLA-related absences, the employer can receive a tax credit of at least 12.5 percent of the amount paid during the 12-week period. In addition, certain stipulations require eligible employees to be paid at least 50 percent of their normal wages, which also defines who is an “eligible” employee.
Do you have questions on the new employer tax credit for paid family and medical leave? The IRS published some Family and Medical Leave FAQs after issuing guidance on the credit in Notice 2018-71. For wages paid in tax years starting in 2018 and 2019, eligible employers can claim a general business credit equal to the “applicable percentage” of the amount of wages paid to “qualifying employees” during any period in which such employees are on “family and medical leave.” The Q&As define many of the terms.
Entertainment and meal expenses
Under the new tax law, there are fewer deductions available for entertainment and meal expenses. Businesses can no longer deduct entertainment expenses — such as taking clients or prospects to sporting events, movies and concerts. This includes expenses for entertainment facilities like a stadium suite or skybox.
However, expenses incurred for recreational or social activities primarily for the benefit of employees — such as a holiday party or summer outing — are still fully deductible. As for entertainment expenses in employee W-2 wages, they’re still fully deductible, too.
Meals provided to employees who are traveling are still 50-percent deductible. Employer-provided meals — provided for convenience on the business’ premises — are now only 50-percent deductible. Previously, these meals were 100-percent deductible. This change now includes meals provided in the employer’s on-site dining facility. And, beginning Jan. 1, 2026, the deduction for employer-provided meals for convenience will be 0 percent.
Based on these changes, it is important to immediately start separating your meal and entertainment expenses into the proper categories — 100-percent, 50-percent, 0-percent deductibility — to better calculate the proper deduction when you file your 2018 tax return. It may also be prudent to conduct a review of your meal and entertainment expenses for 2017 and prior tax years to maximize the deduction under prior rules.
LBMC’s tax team has put together this reference chart as a tool to help you navigate the changes to the meals and entertainment deduction.
The IRS issued Notice 2018-76 spelling out the five conditions that taxpayers must meet to deduct 50% of the cost of business meals.
- The expense must be “ordinary and necessary.”
- The taxpayer (or an employee) must be present at the meal.
- The meal can’t be lavish.
- It must be provided to current or potential customers.
- The meal cost must be separately stated from the entertainment cost.
The Tax Cuts and Jobs Act is complex. Nevertheless, consulting with an expert for all tax matters such as the professionals at LBMC will bring you the perspective your business needs to get the most out of the next tax season.
Arthur Van Buren is a shareholder in the tax practice at LBMC, a premier Tennessee-based professional services firm headquartered in Brentwood. Reach him at 615-309-2292 or firstname.lastname@example.org.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.