Adding long-awaited detail to the proposed U.S. tax reform legislation, text for the bill —titled the “Tax Cuts and Jobs Act”—was released November 2, 2017 by the Ways and Means Committee. “The draft bill holds alarming news for the mobility industry,” said Worldwide ERC® President and CEO Peggy Smith, SCRP, SGMS-T.
“The moving expense deduction is one of numerous deductions and exclusions that were proposed for repeal. Should this aspect of the bill be a part of final legislation, repeal would include the deduction, as well as the exclusion for employer-paid moving expenses. And employers would be faced with additional gross-up expenses.”
David S. Oltman, chief compliance officer, Ineo, LLC provided insight on five categories of expenses that could be impacted by the proposed tax legislation that would affect most Worldwide ERC® members:
- Household Goods (HHG) – 2017 Excludable/2018 Taxable
- Final Move Non-Meal – 2017 Excludable/2018 Taxable
- Duplicate Housing Interest and Taxes – 2017 Deductible/2018 Potentially Taxable
- Points – 2017 Deductible/2018 Potentially Taxable
- Loan Origination Fees – 2017 Deductible/2018 Potentially Taxable
“Those seeking clarification in the proposed tax law about the repeal of moving expense deductions will see that it covers excludable moving expenses as well,” said Oltman. He noted that, per §1310 of the proposed Tax Cuts and Jobs Act, I.R.C. §§ 217, 3121(a)(11), and 3401(a)(15), among others, are repealed. “These cover the deductibility of moving expenses and the exclusion of deductible moving expenses from wages. So the new bill eliminates both the deduction—eliminating IRS Form 3903—and the company exclusion. In addition, W-2 Box 12 letter ‘P’ is no longer applicable.”
The five items cited here are clearly deductible or excludable under current 2017 law, but are mostly all taxable under the proposed 2018 laws. Oltman noted, “If any of those five expense types find their way onto a 2018 W-2 – and let’s say they were incurred after a November cut-off but before December 31, 2017 – the transferee might end up owing taxes that truly would not be due.” Oltman also raised another concern: under the proposed legislation, W-2c forms in corporate America would present a significant issue. Said Oltman, “Well over 90 percent of companies ‘cut off’ expenses between November 1st to December 15th, to allow their accounting and payroll systems time to accept the final passing of relocation accounting data provided by most tax service providers and relocation management companies. For the past 20 years or more, expenses submitted after the ‘cut-off date’ are added to the company’s first payroll pass in the following calendar year. The reason this process and administrative procedure has worked well for this period of time is that the treatment of moving expenses and the general tax rates have remained relatively the same.” Oltman pointed out that under the proposed legislation, should it be effective January 1, 2018, if the provided expenditures that fall under the five expense areas noted above were incurred on or before December 31, 2017, they would be treated as deductible/excludable. If those same expenditures occur on January 1, 2018 or later, they would be potentially taxable.
Oltman also provided this example if the bill moves forward: “Since household goods and final move expenses will become taxable in 2018, and most companies will gross them up—assuming an average HHG invoice of $30,000 and an average gross-up of $25,000—an average transferee would have $55,000 of additional taxable income added to their 2018 W-2. This will grow their 2018 AGI by $55,000; significantly increasing the chances of the transferee losing many potential tax credits and other deductions that might ordinarily be available to them. In turn, most companies will want to gross up their employees for those lost credits. Most companies who move employees might expect to see their average gross-up costs increase approximately $9,000 per move, or an approximate 60 percent increase from last year. Corporations will need to budget and communicate accordingly, and companies’ gross-up and tax assistance policies will surely need to be revisited based on the proposed tax reform bill.”
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