It hasn’t even been a year since President Trump Signed the Tax Cuts and Jobs Act, but it looks like we’re not done with tax reform yet. This summer, Congress began discussing a second round of changes, dubbed “Tax Reform 2.0.” While this latest round of changes are still being defined by the legislature, the original Tax Cuts and Jobs Act is already impacting businesses at every level, and Human Resources (HR) is no exception.
Here’s the highlights on what Hawaii employers need to know to get up to speed on tax reform.
The Tax Cuts and Jobs Act is the biggest overhaul of the U.S. tax code in more than three decades. When it finally passed into law after months of debate, the $1.5 trillion package included some major changes to the tax code, including a permanent cut of the corporate tax rate from 35% to 21%, temporary tax cuts for individual taxpayers, a near doubling of the standard deduction, and a repeal of the individual mandate under the Obama-era Affordable Care Act.
What About Employers?
In addition to a number of other changes that affect businesses, the Tax Cuts and Jobs Act will directly impact the area of Human Resources. From family leave to fringe benefits, here are some of the ways that tax reform is changing the way businesses manage their employees.
Tax Credit for Paid Family Leave
Under the Family and Medical Leave Act, employers must provide up to 12 weeks of time-off each year for employees caring for a new baby or an ailing loved one, but it doesn’t require that leave to be paid. Last year’s tax reform adds a new tax credit for employers who voluntarily compensate workers taking family leave. The credit kicks in if employees on FMLA are paid at least 50% of their normal wages. Businesses receive a tax credit equaling 12.5% of what they compensate the employee, with increases for every percentage point they pay above 50% of the normal wage. (The credit is capped at 25%.)
Keep an Eye on Local Laws
But there’s a catch. Remember that bit about FMLA compensation being voluntary? Employers in states where paid leave is mandatory don’t qualify for the credit. Fortunately for employers in Hawaii, paid leave is still voluntary so businesses still qualify for the credit. But that could change. Bills that would have required employers to provide paid family leave failed to make it through the state Legislature in 2018. But lawmakers did pass a bill calling for a study of the plan and its possible impacts, so look for this issue to make another appearance on the legislative agenda next year.
No More Free Lunch?
Right now, employers who provide free meals to workers during their shifts can deduct 100% of the expenses. That will change under the Tax Cuts and Jobs Act. As of January 1, 2018 the deduction will be cut in half, to 50%. And it will go away altogether in 2026. (Employees can still exclude the benefit from their income.)
But the change doesn’t apply to recreational events, like holiday parties and employee picnics. So if your company likes to put on an annual employee appreciation lunch, those bentos are still 100% deductible.
Parking, Entertainment & Other Business Deductions
Employee meals aren’t the only fringe benefit to see a change. As of the first of this year, businesses can no longer deduct the cost of parking and transportation benefits, including van pools, transit, and employee parking. (Although it’s not yet clear whether the change applies to parking lots that are shared by both customers and employees.)
And if you’ve been encouraging employees to close a deal over a round of golf, or woo clients with concert tickets, you may need to re-think those policies. As of this year, you can no longer deduct entertainment expenses, even if you did business at the event.
Employers can still deduct up to 50% of expenses for business-related meals, however, so there’s no reason to cut back on the lunch meetings for now. Finally, if your business recruits an employee from another island, or hires someone from out of state, you may see a change in how moving expenses are handled. Starting this year, reimbursements for moving expenses are included in the employees’ wages.
Tax Reform 2.0
While the 2017 tax overhaul leaves a lot for employers to take in, more changes may be on the horizon. Earlier this summer, the U.S. House of Representatives Ways and Means Committee released a framework for what representatives are calling “Tax Reform 2.0.”
The two-page document doesn’t offer much in the way of specifics, other than pledging to make individual tax cuts permanent. But it does indicate that businesses will be included in the update, with a special focus on supporting innovation and entrepreneurship by helping new businesses write off more of their start-up costs.
What will that mean for HR and local employers? Stay tuned to find out.