Senate Tax Reform Legislative Text Clarifies Some Provisions

Earlier today, the Senate Finance Committee released legislative text of its version of the Tax Cuts and Jobs Act.  Up until now, only “conceptual language” had been available.  The text clarifies some of the provisions that we have previously discussed in our posts about the Senate bill (see earlier discussions herehere and here) and includes new information reporting requirements that we have not previously covered:

  • The legislative text would disallow any deduction for meals provided at the convenience of the employer and meals provided in an “employer-operated eating facility.” If the employer chooses to offer food and beverages, they will remain excludable (to the extent currently excludable) from the employee’s income and wages under section 132, but the cost of providing them would not be deductible.  It is somewhat unclear what the effect of the deduction disallowance would be with respect to employer-operated eating facilities that collect sufficient revenue to cover their operating expenses.  Arguably, the provision could result in the employer recognizing revenue for the food and beverages sold to employees in the facility but having no deduction for the costs associated with selling food and beverages.  (Update: Upon further thought, we believe that the employer would not lose the deduction to the extent the employees pay for food and beverages purchased from the employer-operated eating facility because only the value of such food and beverages in excess of the amount paid is excludible from income under Code section 132(e) as a deminis fringe benefit.)  The new total deduction disallowance would be repealed for taxable years beginning after December 31, 2025, provided government revenue exceeds a target during the period 2018 through 2026.  The provision is effective if the cumulative on-budget Federal revenue from all sources for the 2018 through 2026 government fiscal years exceeds $28.387 trillion.
  • As expected, the text would eliminate the exclusion for bicycle commuting reimbursements, but in a surprise, the elimination is only temporary. The bill adds a new Code section 132(f)(8), which suspends the availability of section 132(f)(1)(D) from 2018 through 2025.  The exclusion would become available again in 2026.  This suggests that the Finance Committee’s decision to eliminate this exclusion may be driven more by revenue demands than by policy considerations, as it helps ensure the reconciliation bill meets the revenue target within the budget window.
  • Also as expected, the deduction for moving expenses and the related exclusion for qualified moving expense reimbursement were eliminated, but they too are only temporary suspensions. The bill would eliminate the deduction under Code section 217 and the exclusion under Code section 132(a)(6) (with an exception for active duty military moving pursuant to a military order and incident to a permanent change of station) from 2018 through 2025.  The exclusion would become available again in 2026.  Revenue demands likely also drove this change.
  • As we discussed in an earlier post, the Senate text makes changes to Code section 162(m) eliminating the exceptions for performance-based pay and commissions to the $1,000,000 deduction limitation for executive remuneration. However, unlike the conceptual language released earlier that contemplated an even broader expansion of the definition of “publicly held corporation,” the Senate text adopts a definition identical to the expanded definition in the House tax reform legislation (discussed here).  The Senate text does not include large private corporations as contemplated by the conceptual language.
  • The Senate text would add a new subsection (l) to Code section 272 that, as expected, eliminates the employer’s deduction for any expense, payment, or reimbursement for providing transportation to an employee in connection with travel between the employee’s work and the employee’s residence. This would eliminate the deduction for qualified transportation fringes, including van pool expenses, transit passes, parking, and other amounts excluded from the employee’s income under Code section 132(f).  This would seem likely to reduce the popularity of pre-tax transit programs under which employees elect to forgo taxable compensation in exchange for transit benefits, because the employer loses a deduction for compensation expenses that it would otherwise be entitled to as a result of the employee’s election to receive some of his or her compensation in the form of transit benefits.  The provision, as we speculated in an earlier post, does not carve out transportation reimbursements taxable to the employee.  For example, if an employee lives away from his tax home (i.e., his or her place of principal employment), the bill appears to disallow the compensation deduction if the employer elects to pay the employee for transportation costs between the employee’s residence and the office even though such amount is taxable to the employee.
  • As described in the Finance Committee’s conceptual language, the legislative text would adopt a new Code section 6050X. The language would require government agencies (or entities treated as government agencies) to report to the IRS and taxpayer on a new information return the amount of each settlement agreement or order entered into where the aggregate amount required that the government required or directed to be paid or incurred exceeds a threshold ($600, in the statute, but subject to adjustment by the Treasury).  The return must identify any amounts that are for restitution or remediation of property or correction of noncompliance, which are deductible, unlike fines and penalties paid under the agreement.
  • As also described in the Finance Committee’s conceptual language, the legislative text would also adopt a new Code section 6050Y that would create a new information reporting requirement for certain life insurance contract transactions. This includes: (a) a return filed and furnished by every person who acquires a life insurance contract or any interest in a life insurance contract in a reportable policy sale; (b) a return filed and furnished by each issuer of a life insurance contract upon notice of a transaction reported under (a); and (c) a return filed and furnished by every payor of reportable death benefits.  A reportable policy sale is generally the acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial relationship with the insured.  A reportable death benefit is an amount paid by reason of death of the insured under a life insurance contract that was transferred in a reportable policy sale.  The buyer must file the return required under (a) with the IRS and furnish copies of the return to the insurance company that issued the contract and the seller.  The insurance company that bears the risk with respect to a life insurance contract that receives a copy of a return required under (a) must file the return required under (b) with the IRS and furnish a copy of the return to the seller.  The payor insurance company   must file the return required under (c) with the IRS and furnish a copy of the return to the payee.  The reporting requirements would apply for reportable death benefits paid and reportable policy sales after December 31, 2017.
  • The Senate text would also adopt a new Code section 6050Z imposing three new information reporting requirements. The first would require taxpayers making research and experimental expenditures (as defined in Code section 174) to file an information return reporting the aggregate amount of such expenditures.  The second would require taxpayers making payments to a foreign person that is a related party (within the meaning of Code section 59A) to report the amount of such payments by type and any amount paid that results in a reduction of gross receipts to the taxpayer.  The third would require taxpayers that receive foreign-derived intangible income to file an information return that includes the aggregate amount of such income, the amount of foreign-derived deduction eligible income (as defined in section 250(b)(4)), and a certification that any foreign-derived deduction eligible income does not relate to the sale of products for any use, consumption, or disposition within the United States.  The text would impose a penalty of $1,000 per day up to $250,000 under Code section 6652(q) for failure to comply with these requirements.  The reporting requirements would be effective for taxable years beginning after December 31, 2024; however, it only takes effect (along with the associated changes to various deduction provisions) provided government revenue exceeds a target during the period 2018 through 2026.  The provision is effective if the cumulative on-budget Federal revenue from all sources for the 2018 through 2026 government fiscal years exceeds $28.387 trillion.

Welcome to Miller & Chevalier’s Tax Withholding & Reporting Blog

The Tax Withholding and Reporting Blog is a resource for in-house counsel, tax, accounts payable, and payroll professionals seeking information on tax withholding and reporting developments.  With respect to tax withholding, the blog will feature articles on employment taxes, including federal income tax withholding and Federal Insurance Contributions Act (FICA) taxes.  We will also report on regulatory and statutory developments, as well as new court cases on backup withholding under section 3406, Chapter 3 (withholding on payments to nonresident alien individuals and corporations) and Chapter 4 (Foreign Account Tax Compliance Act, or FATCA).  Moreover, we will provide information on withholding requirements imposed by the states—such as California’s withholding requirements for payments to non-California residents—as they seek new ways to protect their tax bases.

In addition to covering tax withholding issues, the blog authors will cover a wide range of topics related to information reporting, including domestic information reporting on Forms 1099 (including 1099-DIV, 1099-INT, 1099-MISC, 1099-K and others) and cross-border information reporting on Forms 1042 and 1042-S.  In addition, we will monitor and post to the blog developments on the OECD country-by-country (CbC) reporting requirements being implemented into U.S. law, and will cover new information reporting requirements under the Affordable Care Act (Forms 1094-B, 1094-C, 1095-B, and 1095-C).  The Tax Withholding and Reporting Blog will cover not only the substantive requirements of the law, but information on related penalties, penalty abatement, IRS audit trends and other topical stories.

The Tax Withholding and Reporting Blog is available as a free resource and is authored by attorneys in the Miller & Chevalier’s Tax Withholding and Information Reporting practice.