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Passage of Tax Reform Means Changes for Employers

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The Tax Cuts and Jobs Act (H.R. 1), which has been passed by both houses of Congress (twice by the House of Representatives due to a violation of the Byrd Rule), represents the first major rewrite of the tax code in more than 30 years. The bill will now make its way to President Trump for his signature, which is expected to occur this week.

With projections that the bill will increase the deficit by about $1.5 trillion, the legislation contains many provisions for individual taxpayers as well as corporations — all of which will take effect on Jan. 1, 2018, (though, individual tax breaks expire at the end of 2025, while the corporate cuts are permanent). There are only a few days left in 2017, so here’s a lineup of some of the key provisions for HR and TR professionals. WorldatWork will continue to monitor on and report updates regarding relevant TR provisions of the law.

Corporate Tax Rate
Representing the largest one-time reduction in the corporate tax rate in U.S. history, beginning in January the corporate tax rate falls from 35% to 21%, amounting to roughly a $1 trillion tax cut for businesses in the next decade.

Discussions around the drop in the tax rate is that it would free up money for businesses to make other investments in equipment — and people. However, while the bill may create tax incentives to encourage employers to create jobs, it also allows employers to write-off the full value of machines right away — perhaps encouraging automation without an accompanying incentive for hiring humans.

Deduction Limit on Compensation Above $1 Million
Currently, the deduction for publicly traded companies is limited to $1 million annually for generally the CEO and the other three highest compensated officers other than the CFO. The limit does not apply to performance-based compensation (including stock options or commissions). Whether someone is in the covered group is determined as of the close of the employer’s taxable year.

Under the tax bill, the exceptions for commissions and performance-based compensation would be removed. And the covered group of employees would be expanded to include any employee who was the CEO or CFO at any time during the taxable year, in addition to the three highest-compensated officers for the taxable year (other than the CEO or CFO). Also, the company is subject to the deduction limit if the company is required to file reports under Section 15(d) of the Securities Exchange Act, even if the company isn’t required to register its securities. The bill includes a transition rule that grandfathers future compensation paid to employees from the changes if the compensation is paid under a written binding contract in effect on Nov. 2, 2017, as long as the terms of the contract aren’t modified in any material way on or after that Nov. 2 date. A contract that is renewed after Nov. 2, 2017, would be treated as a new contract.

Qualified Equity Grants for Private Companies
Currently, an employee must generally recognize stock-based compensation as income in the year in which the employer transfers the stock to the employee or in which there is no longer a substantial risk of forfeiture, regardless of whether the stock is tradeable on an established securities market. Effective in 2018, the bill allows private companies to offer rank-and-file employees the opportunity to defer income attributable to stock received following a stock option exercise or settlement of an RSU for up to five years if the stock is not tradeable on an established securities market.

Compensation of Tax-Exempt Organization Executives
Effective beginning in 2018, the bill imposes on tax exempt organizations a new 21% excise tax payable by employers on total annual compensation exceeding $1 million and excess parachute payments paid to covered employees. Covered employees include the organization’s five most highly paid employees, and once an employee is a covered employee in any taxable year beginning after 2016 the employee would remain a covered employee.

Health Insurance Mandate
The individual health insurance mandate under the Patient Protection and Affordable Care Act currently requires individuals to buy health insurance or pay a tax penalty. With the signing of the tax bill, the mandate will be repealed beginning in 2019. The Congressional Budget Office is projecting that this change will increase insurance premiums and lead to 13 million fewer Americans with insurance in 10 years, while cutting government spending by more than $300 billion over that same period.

Fringe Benefits
Under current law, employers may provide certain benefits (e.g., adoption assistance, dependent-care assistance, moving reimbursements) on a tax-free basis to employees. Under the bill, the tax break for moving reimbursements will be eliminated (except as it applies to the military), but breaks for dependent-care assistance, adoption assistance and educational assistance will remain.

In addition, the bill repeals the employer’s deduction for the cost of providing to employees parking or transit passes worth up to $255 per month. Also, the bill repeals the qualified bicycle commuting reimbursement, which allows employees to exclude from their income qualified bicycle commuting reimbursements of up to $20 per qualifying bicycle commuting month.

With the passage of the bill, employers could still offer the benefit, but will no longer be allowed the tax deduction and the benefits will be taxable income for the employee. Whether employers continue to offer these transportation benefits are important decisions for employers to make and communicate to employees.

The bill does require nonprofit employers to include in their unrelated business taxable income any qualified transportation benefits and expenses paid for on-site athletic facilities, unless they’re deductible under IRS Code Section 274.

Employee Achievement Awards
Employee achievement awards for length of service or safety achievements currently are excluded from employee’s income if certain conditions are met. Starting in 2018, the exclusion for the employee and the deduction for the employer will not apply to cash, gift coupons, gift certificates, vacations, meals, lodging, tickets to sporting or theater events, securities and “other similar items.” A deduction/exclusion for any other tangible property and gift certificates allowing the employee to select tangible property from a limited array of items pre-selected or pre-approved by the employer would still be allowed.

Benefits
Another provision in the bill gives employers a tax credit if they pay employees during FMLA leave. To be eligible for the credit, and employer must allow all “qualifying” full-time employees not less than two weeks of annual paid family and medical leave, and a commensurate amount of leave for less-than-full-time employees on a pro-rata basis.

Retirement Benefits
Once a traditional IRA is converted to a Roth IRA, it cannot be converted back to a traditional IRA under the tax bill. However, the bill does not affect the ability to convert a traditional IRA to a Roth. The bill also extends the rollover period for plan loan offset amounts that result from severance from employment or plan termination. It allows these rollovers to occur as late as the due date for filing the employee’s tax return for the year of severance or plan termination.

The annual limit for length-of-service awards for public safety volunteers is doubled, from $3,000 to $6,000, and it indexes the limit to inflation. Finally, the bill provides early distribution relief for 2016 disaster victim for distributions from retirement plans and IRAs made before 2018.

Individual Income Tax Treatment
The bill keeps the current seven tax brackets and reduces the tax rates, though this provision expires at the end of 2025. The standard deduction is nearly doubled, from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married couples. And the personal exemption is repealed.

Current Income
Tax Rates

Income Tax Rates Under the Tax Cuts and Jobs Act for Tax Years 2018-2025

Percentage

For Individual Filers

For Joint Filers

10%

10%

Less than $9,525

Less than $19,050

15%

12%

$9,525 to $38,700

$19,050 to $77,400

25%

22%

$38,701 to $82,500

$77,401 to $165,000

28%

24%

$82,501 to $157,500

$165,001 to $315,000

33%

32%

$157,501 to $200,000

$315,001 to $400,000

35%

35%

$200,001 to $500,000

$400,001 to $600,000

39.6%

37%

More than $500,000

More than $600,000

When tax rates are reduced, taxpayers (both employers and employees) often find it worthwhile to defer income into the next year and take as many deductions and credits as possible in the current year. In addition to reduced tax rates, there also are changes to deductions and credits with this tax reform legislation. Organizations and individuals may want to consider what effect and opportunities these tax changes bring and make plans — quickly, in some cases, as again, some changes are effective in just a couple of weeks.

Pass-Through Credit
In pass-through companies, business owners take their income in the form of a profit distribution rather than a salary. This is known as pass-through income, and it’s been taxed at personal income rates. Beginning in 2018, the bill allows the company to pass through profits and losses on the individual’s personal income tax return, and the individual will be able to deduct the first 20% of income. However, the deduction is disallowed for businesses offering “professional services,” above a threshold amount.

Alternative Minimum Tax
The bill ends the alternative minimum tax (AMT) for corporations, but retains the individual AMT, albeit with higher exemption amounts. Originally introduced to impose a minimum tax on taxable income above a designated exemption, the AMT was intended to ensure people with higher incomes pay a minimum amount of tax. Under the bill, the threshold for individuals is raised from $120,700 for individuals and $160,900 for those filing jointly to $500,000 for individuals and $1 million for joint filers — meaning fewer filers having to pay the tax.

Child-Tax Credit
The child-tax credit will be more beneficial for low-income families and the working class, increasing the refundability of the credit from 55% to 70%. Currently, the child-tax credit is $1,000 per child. Under the legislation just passed, the credit bumps up to $2,000 per child. Also, more of the tax credit is refundable, so families who work but don’t earn enough annually to owe any federal income taxes will get a check back from the government. The credit will phase out for all taxpayers with modified annual gross income in excess of $400,000 (joint returns) or $200,000 (all other returns), which would not be indexed for inflation.

In addition to the links provided in this article, information also was gathered from:

 Additional information also can be found at:

Sue Holloway, CCP, CECP, WorldatWork

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