With tax season getting ready to kick into high gear, it’s important to remember how much has changed for businesses since the Tax Cuts and Jobs Act (TCJA) was passed in late 2017.
You may remember that the new tax law opened up tax saving opportunities for many businesses–like the new 100 percent first-year bonus depreciation provision. However, it also reduced or eliminated several mainstay tax breaks — like most entertainment expense deductions, for example.
And the changes just keep coming. The IRS recently issued new rules concerning both employee benefits and executive compensation. These developments have broad implications for the years ahead and may factor into your current tax planning strategy.
So, what’s the best way forward? Let’s first take a look at the tax changes that are most likely to impact your business for 2019 taxes.
New Rules to Consider
- Health reimbursement arrangements (HRAs) have been expanded to give more choices to both businesses and their employees. It used to be that HRAs could only be offered with an employer sponsored health plan, but now employees can pair an HSA with a health plan from the public marketplace.
In this case, an HSA can be used to cover the premiums of a self-selected insurance plan and any other qualifying medical expenses. It works much like a flexible spending account (FSA), except contributions may only be made by the employer. We see this new rule playing a role how insurers and businesses put together health benefit packages in the near future.
New HRA options take effect January 1, 2020. Talk with your CPA right away if you are thinking about incorporating HRAs into your company’s health plan for the new year.
- The Employer Credit for Paid Family and Medical Leave is set to expire on December 31, 2019. It’s possible that Congress may retroactively extend this business credit. It was passed as part of the TCJA only two years ago, and there seems to be some interest in expanding FMLA in this way.
The tax savings are available to businesses if an employee takes at least two weeks of paid family and medical leave. That employee must be paid at least 50 percent of his/her wages for your business to qualify for the tax credit. Keep in touch with your CPA to find out if this provision makes it into the new year.
- The IRS issued guidance for qualified transportation fringe benefits earlier this year. Basically, employers aren’t able to take a deduction on any transportation benefits offered to employees anymore. That means transit passes, parking fees, commuter highway vehicles, and bicycling reimbursements are still perks for the employee but don’t offer any tax savings for the employer.
- The TCJA shook up the world of executive compensation. It used to be that companies could take a tax deduction for up to $1 million for the CEO and the next three highest paid officers. Under the old law, performance-based compensation over that dollar limit could also be deducted. Things are much different now.
The current law applies to the CEO, the three next highest paid officers, and now the CFO. Once an employee is covered by the new rules, he/she is always considered subject to them, even in retirement and death.
Performance-based compensation is no longer in a separate category, which means the $1 million limit applies to all forms of compensation. Going forward, anything over the $1 million mark, including stock options and bonus plans, is not deductible.
But, there is an exception. The IRS recently issued guidance concerning grandfathering that says that if a contract was in effect on November 2, 2017, then the old rules apply.
As you can imagine, this new law is already impacting executive compensation packages and how businesses handle their deferred tax assets. Naden/Lean can walk you through the changes as they relate specifically to your company.
Take a look at our post last month about other 2019 year-end tax planning tips, like accounting for the QBI deduction (if it applies), business expensing, opportunity zones, and more.
Important Changes to Remember
Looking back, the TCJA changed a number of other provisions that may affect your tax planning and overall business strategy. Favorable developments include the new flat 21 percent tax rate for corporations, the elimination of corporate AMT, and the 100 percent first-year bonus depreciation amendment.
However, there are new limits as well, including the complete elimination of entertainment expense deductions.
There’s a lot to consider going forward. The team at Naden/Lean can help you sort through the details. Contact us to set up an appointment.