The Tax Cuts and Jobs Act (TCJA), signed into law last December, contains several provisions that will directly affect the tax strategies employed by dealerships. These include a new flat corporate tax rate, changes to how equipment is depreciated and a new deduction for dealerships structured as pass-through entities.
A lot of attention has rightly been devoted to these issues. But there are other less-publicized provisions of the legislation that also could have a consequential impact on dealerships, notably the tax treatment of employee fringe benefits.
Law limits meal and entertainment deductions
One of these provisions involves the deductibility of business-related meals and entertainment. Pre-TCJA, dealerships could generally deduct 50% of these costs, or 100% of the cost of meals provided to employees on or near the employer’s premises for the employer’s convenience.
The TCJA has repealed the deduction for all business-related entertainment expenses, for tax years starting after December 31, 2017. Tickets to sporting events, concerts, or shows; rounds of golf; and any other entertainment, amusement or recreation expenses are no longer deductible. The days of fostering relationships with key employees, vendors, and other business contacts—and receiving a tax benefit—are gone.
Expenses for employees’ business-related meals (including those incurred while employees are traveling for business) will continue to be 50% deductible.
However, the deduction for meals provided to employees on or near the dealership’s premises is now reduced from 100% to 50%. This includes not only the doughnuts or pizza you might pick up or have delivered for employees, but also meals that employees eat in an on-premises cafeteria. The cost of these meals can still be excluded from employees’ taxable income.
On October 3, 2018, the IRS issued Notice 2018-76, clarifying the gray area in the TCJA as to whether a business meal with a client, customer or business contact should be treated as entertainment or meals. Until passage of regulations defining entertainment, taxpayers can rely on this notice to deduct 50% of a business meal expense if:
- The meal is an ordinary and necessary expense paid or incurred in carrying on a trade or business;
- The meal is not lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
Examples of the new rules:
- Dealer principal invites the dealership’s legal counsel to a baseball game. The dealer purchases tickets for both to attend the game. While attending the game, the dealer buys hot dogs and beverages for both.
The cost of the game tickets is nondeductible entertainment, while the cost of the hot dogs and beverages are 50% deductible meals expense.
- Dealership’s general manager invites manufacturer’s representative to a basketball game. GM purchases tickets for both to attend the game in a suite, where they have access to food and beverages. The cost of the game tickets, as stated on the invoice, includes food and beverages.
The game tickets are nondeductible entertainment. Since the food and beverage is not purchased separately from the tickets or separately stated on the invoice, the cost of food and beverage is also a nondeductible entertainment expense. If the food and beverage cost was separately stated, it would be a 50% deductible meals expense.
As expected, the IRS included anti-abuse language in the notice. Taxpayers cannot circumvent the disallowance of entertainment expenses by inflating the amount charged for food or beverages.
Legislation repeals transportation benefits deduction
Another provision involves the deductibility of employer-provided employee transportation benefits. Previously, dealerships could deduct expenses paid for employees’ mass transit passes, parking allowances and van pooling, up to monthly limits, and employees could exclude that amount from income.
Starting with tax years after December 31, 2017, the deduction for employees’ qualified mass transit and parking expenses paid by employers has been repealed. There’s an exception if the transportation is necessary for an employee’s safety — for example, if an employee must work late at night and takes a taxi or Uber home.
Note that the cost of these transportation benefits is still tax-free to employees. Or employees can choose to pay their own mass transit or parking expenses with pretax income using an employer-sponsored salary reduction program.
TCJA curbs achievement award deductions
The TCJA also limits the deductibility of achievement awards provided to employees.
In general, the value of an “employee achievement award” is not included in the recipient employee’s gross income if the cost of the award does not exceed the amount allowable as a deduction to the employer. To qualify for this exclusion the award must be tangible personal property given in recognition of the employee’s service or safety achievement at a ceremony that is a meaningful presentation.
The TCJA clarified and codified prior proposed regulations that stated “awards” for this purpose do not include cash, cash equivalents such as gift cards/certificates/coupons, vacations, meals, or tickets to theater/sporting events. Those types of awards are considered disguised compensation and are taxable to the employee (and therefore deductible to the employer as compensation).
New family and medical leave credit launched
The news isn’t all bad as it relates to fringe benefits. The legislation also includes a new federal tax credit for eligible employers that provide paid family and medical leave to employees.
To be eligible, your dealership must have a written family and medical leave program that pays qualified employees at least 50% of their regular wages for a minimum of two weeks. The credit will be equal to a minimum of 12.5% of wages paid for up to 12 weeks. And it can be as much as 25% of wages paid if you pay 100% of employees’ wages.
You must offer this benefit to both full and part-time employees to claim the credit, which can only be applied toward employees who earn less than $72,000 annually. The credit is generally available for wages paid between December 31, 2017, and January 1, 2020.
Employee relocation and moving expense change
The business deduction for employer-paid qualified moving expenses has been suspended for tax years 2018 through 2025. Also, most employees who receive these reimbursements of qualified moving expenses must include the amount in taxable income. This is important to dealerships which move key executives from one location to another or recruit from other locations, or ask next generation family members to relocate in order to step into key leadership roles at the dealership.
Impact on your dealership?
These tax reform provisions could affect the menu of fringe benefits you offer. So, speak with your tax advisor about the potential impact on your dealership and its employees.
