Tax Reform Implications for Payroll and Fringe Benefits

WEALTH ADVISORY | OUTSOURCING | AUDIT, TAX, AND CONSULTING
Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC,
an SEC-registered investment advisor. | ©2018 CliftonLarsonAllen LLP
Tax Reform Implications
Mark Boutilier, Senior Business Analyst/Consultant,
Net@Work
Chastity Wilson, JD, LLM, CPA, Principal,
CliftonLarsonAllen, LLP

©2018CliftonLarsonAllenLLP
Learning Objectives
• At the end of this session, you will be able to:
– Understand those fringe benefits impacted by tax reform
– Identify the key modifications to excessive employee
compensation
– Understand when meals and entertainment are deductible
– Identify other key payroll considerations in light of tax
reform

Tax Reform Implications

Agenda
• Overview of key changes to corporate and individual
tax rates
• Discussion of payroll-related provisions
• Next steps

H.R.1 – Tax C)
• H.R.1 Official Title: “An Act to provide for
reconciliation pursuant to titles II and V of the
concurrent resolution on the budget for fiscal year
2018.”
• December 22, 2017: Signed into law by President
Trump (Public Law No. 115-97)
H.R.1 – 2017 Tax Act

Comparison of MFJ Rates: Prior 2018 Rates vs.
2017 Tax Act
CAUTIONS: Taxable income measures differ; child credit rather than
dependency exemption but with age differences.
Income range Scheduled 2018 rate TCJA
$1 to $19,050 10% 10%
$19,051 to $77,400 15% 12%
$77,401 to $156,150 25% 22%
$156,150 to $165,000 28% 22%
$165,001 to $237,950 28% 24%
$237,951 to $315,000 33% 24%
$315,001 to $400,000 33% 32%
$400,001 to $424,950 33% 35%
$424,950 to $480,050 35% 35%
$480,051 to $600,000 39.6% 35%
Over $600,000 39.6% 37%

2017 Corporate Tax Rates (Graduated)
Tax Bracket Taxable Income
15% 50,000
25% 75,000
34% 100,000
39% 335,000
34% 10,000,000
35% 15,000000
38% 18,333,333
35% EXCESS
Corporate AMT Tax Rate = 20%
Corporate Tax Rate Under 2017
Tax Act:
• Flat 21% Rate, effective for tax
years beginning after December
31, 2017*
• 20% Corporate AMT Repealed
(Prior Alternative Minimum Tax
(AMT) Credits refundable up to 50%
of excess AMT credits > regular tax
liability for 2018 – 2020; Remaining
AMT credit refunded in 2021)
* Blended tax rate for corporations with fiscal years beginning before 12/31/2017
Corporate Rates

Tax Bracket Pre-2017 Tax Act Under 2017 Tax Act
Standard
Deduction
Single: 6,350
MFJ: 12,700
HoH: 9,350
Single: 12,000
MFJ: 24,000
HoH: 18,000
Personal
Exemption
$4,050 per Individual
*Subject to AGI Phase-out
Repealed
Mortgage
Interest
Debt Limit: $1.1M
2nd
Home Allowed: Yes
Home Equity Interest Allowed: Yes
Debt Limit: $750,000
2nd
Home Allowed: Yes
Home Equity Interest Allowed: No
Taxes
Itemized Deduction Allowed for:
• Real Estate Tax (U.S. Property Only)
• Personal Property Tax
• State/Local Income Tax (or sales tax)
*Subject to AGI Phase-out
Itemized Deduction Limited to
$10,000 for the Aggregate of State
& Local Property, Income Taxes, and
Sales Taxes
Charitable
Deductions
Limited to 50% AGI
Limited to 60% AGI
*80% Deduction for Athletic Tickets Repealed
Miscellaneous
Deductions
Itemized Deduction Subject to 2% AGI Floor
(includes employee business expense,
investment expenses, tax prep fees,
professional dues, etc.)
Repealed
Medical
Expenses
Subject to 10% AGI Floor Subject to 7.5% AGI Floor
*Retroactive to 2017
Individual Deductions

New Withholding Tables
• IRS Notice 1036 (1/11/18)
• Withholding tables can be found at www.irs.gov
– Begin using ASAP, but no later than February 15, 2018
• Designed to work with current W-4
• Reduced backup withholding rate
– 24% from 28%
• IRS to issue revised Publication 1494
– Wage levy exemption table

Fringe Benefits
• Qualified transportation fringe NOT deductible
– Any transit pass
– Qualified parking
– Includes - any transportation provided/reimbursed for
employee travel between residence and place
employment
◊ Exception for “as necessary for ensuring the safety of the
employee”
– Deductible if reported as wages to the employee
• Still excluded from employee’s income
• Employees may still use pretax dollars

Fringe Benefits
• Moving expenses
– No deduction and employer reimbursements are taxable
◊ If employer pays employee’s moving expenses or reimburses the
employee for such expenses, the employer can deduct the
payment/reimbursement as compensation; however, the
employee cannot deduct and must pick up as income on their
Form 1040
– Does not apply to members of the Armed Forces on active
duty who moved pursuant to military order

Performance Based Compensation &
Commissions
• Performance-based compensation and commissions are
taken into account in determining whether covered
employee’s compensation exceeds $1 million
• Applies to domestic and foreign publically traded
companies
• Covered employee includes, any of the following after
12/31/2016:
◊ CEO
◊ CFO
◊ 3 other most highly compensated officers
– Once a covered employee always a covered employee

Defer Income on Stock Option/RSUs – Section
83(i) Election
• A qualified employee receiving qualified stock may be able to elect
deferral of income up to five years
– Qualified employee does not include CFO, CEO, 1% owners or one of
the four highest paid officers
• Qualified stock
– Stock received in connection with an exercise of an option or
settlement of an RSU; and
– Issued with respect to employee’s performance of services and issued
by an eligible corporation
– Does not include stock if the employee can sell the stock to the company
or receive cash in lieu of the shares.
• Eligible corporation
– Isn’t publically traded, and not less than 80% of qualified employees
were issued options or RSUs

83(i) Election
• Making the election
– Made in a manner similar to a Section 83(b) election
◊ The name, address, taxpayer identification number
◊ A description of the property to which the election is being made;
◊ The date or dates on which the property is transferred;
◊ The nature of the restriction or restrictions to which the property is subject;
◊ The fair market value at the time of transfer; and
◊ A statement to the effect that copies have been furnished to the person or
persons for whom the services were performed
– A copy of the Section 83(i) election must be furnished to the IRS and
employer
– The election must be made no later than 30 days after receipt or no
risk of substantial forfeiture
– A Section 83(i) election cannot be made if a Section 83(b) election has
been made

83(i) Election
• Employer’s notification to employee
– The employee may elect to defer income under Section 83(i);
– The income recognized at the end of the deferral period will be
based on the stock's value when the stock first vested, whether
or not the stock has declined in value during the deferral period;
– Income recognized at the end of the deferral period will be
subject to withholding at the highest individual income tax rate;
and
– The corporation must also notify the employee of the
employee's responsibilities with respect to the withholding
• Penalty for failure to provide notification = $100/failure
up to $50K

83(i) Election
• W-2 reporting requirements
– Employer must report the amount of income covered by a
Section 83(i) election for
◊ The year of deferral, and
◊ The year the income's required to be included in income by the
employee
◊ Must withhold at the highest individual rate
– The employer must report the aggregate amount of
income covered by Section 83(i) elections, determined as
of the close of the calendar year

Family and Medical Leave Credit
• 12.5% to 25% credit
– Increase of .25% for every percent above 50%.
• General business credit
– Form 3800
– Can reduce AMT
• Eligible employer
– Provide minimum of 2 weeks of annual family/medical leave in
written policy
◊ Cannot exceed 12 weeks for purposes of the credit
– Wages paid during leave cannot be less than 50% of normal wages
◊ Ratio for part-time employees
• Qualifying employees
– Employed for at least a year
– In 2018, wages cannot exceed $72,000

Example
Employer has a written policy that provides qualifying
employees will be paid 60% of the normal wages
during family/medical leave. The employer pays
$20,000 of qualifying wages.
Credit: $20,000 x 15%* = $3,000
*12.5%
+ 2.5% (10 x .25)
15%

• Credit, for each qualifying employee, cannot exceed
normal wages
– Example: Employee normally paid $20/hour and takes 40
hours of family/medical leave. Credit cannot exceed $800
◊ Calculated for each qualifying employee compared to percentage
limitation which is calculated on the aggregate
◊ Non-hourly wages are prorated on an hourly basis
• Does not includes wages identified as vacation leave,
personal leave, or medical or sick leave
– Further clarification needed

• Any leave which is paid by a state or local
government or required by state or local law isn't
taken into account in determining the amount of
paid family and medical leave provided by the
employer
• Only applies to wages paid between January 1, 2018
and December 31, 2019
• Can't take both a credit and a deduction for amounts
for which the paid family and medical leave credit is
claimed

Meals and Entertainment
• Entertainment Expense: Non-Deductible!
– Social, athletic and sporting clubs treated as
entertainment
– Expenses for recreational, social, or similar activities
primarily for the benefit of employees remain deductible
• Employer-provided eating facility limited to 50%
– Pre-TCJA: 100% Deductible
– Also repeals employer deduction for employer-provided
on premises meals and employer eating facilities after
2025
• Meals consumed on work travel remain 50%
deductible

Employee Achievement Awards
• Employer can deduct costs associated with giving
employee achievement awards of tangible personal
property
– New law defines tangible personal property as not
including:
◊ Cash or cash equivalents
◊ Gift cards, gift coupons or gift certificates
◊ Vacations, meals, or lodging
◊ Tickets to theater or sporting events,
◊ Stocks, bonds, other securities, and
◊ Other similar items

Employee loans from retirement plans
• Extended rollover period for plan loan offsets
– Employee may roll over the deemed distribution to an
eligible retirement plan
– Rollover can be made any time up to the due date
(including extensions) of the employee's tax return for the
year of the deemed distribution

ACA Individual Mandate
• No shared responsibility payment required after
2018
– After 2018, no penalty imposed for failing to maintain
minimum essential coverage
• Employer mandate provisions remain in place

Expanded 529 Plans
• Qualified higher education expenses include tuition
at an elementary or secondary public, private, or
religious school, up to a $10,000 limit per tax year

Next Steps
• Understand the implications of the 2017 Tax Act
• Monitor IRS and Treasury Department for guidance
– Notices and regulations
• Technical corrections bill
27

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• A professional services firm with three distinct
business lines
– Wealth Advisory
– Outsourcing
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• More than 5,000 employees
• Offices coast to coast
• Serving Higher Education institutions for more than
50 years
Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC.
28

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Payroll Tax Updates:
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Thank you!
Mark Boutilier, Senior Solutions Engineer
Net@Work
Direct 207-480-4805
mboutilier@netatwork.com
Chastity Wilson, JD, LLM, CPA, Principal
CliftonLarsonAllen, LLP
Direct 612-397-3358
chastity.wilson@CLAconnect.com

Tax Reform Implications for Payroll and Fringe Benefits

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