By now most anyone reading this post is aware of how the Tax Cuts and Jobs Act will impact U.S. relocation expenses at the federal level for 2018 through 2025. In January, we published, "What does the new U.S. tax law mean for mobility?" As a reminder, here are a few bullet points about some specific expenses that have now become taxable:
- The costs for packing, shipping and delivering household goods, autos and pets
- The first 30 days of storage, along with the costs of moving items in and out of storage
- Final move (en route) trip costs — think a portion of mileage reimbursement and airfare, for instance
- Duplicate housing interest and taxes, loan origination fees and points
Due to these changes in taxability, companies have had to decide how they wanted to handle these now taxable expenses going forward for 2018. If they currently offer "gross up" support to employees for taxable expenses as part of their relocation or assignment policies, will they maintain that same level of support and incur greater program costs or will they prefer to change their policy and have employees take on more of the taxes owed on these specific benefits or all taxable expenses. The latter could make their relocation program less competitive and provide a worse experience to relocating employees. For those that were not offering any gross up previously, they also had to consider the impact to employees who would now have a greater tax burden due to these expenses. To be compliant, a greater amount of withholding from employee paychecks would need to occur to cover the taxes owed on those expenses which is not something employees typically like seeing in their pay stubs.
Once companies determined how they wanted to handle these expenses going forward (gross up or withhold), the other question was related to these expenses that were incurred in 2017, but not paid until 2018 - how did they want to treat those? They could choose to handle them as they had previously in 2017 (as excludable or non-taxable) or as they will be treated in 2018 going forward as taxable.
In the end, most all the companies that we are working with have chosen to maintain their existing policy and practices as it relates to gross up and treatment of taxable expenses, knowing that relocation program expenses for 2018 will be greater. They will review at the end of the year to see just exactly how much more cost has actually been incurred. We have helped companies predict the impact on their mobility program. We have run comparisons to see how much more the same expenses that past year (2017) would cost in 2018. Program costs varied drastically due to the wide variety of benefits offered to employees, and the variation of volume and types of moves.
One issue that lingers though, is how to deal with payroll reporting at the state level primarily because there are still 12 states that have not declared whether they will follow recent changes to the Federal Internal Revenue Code (IRC). As of March, there had been 21 states that were determining what their stance would be, but recently Arizona, Kentucky, Virginia and New York decided to not conform, while Georgia, Idaho, Oregon, West Virginia and Wisconsin decided to conform.
The 12 remaining states left to declare themselves are:
- New Jersey
- North Carolina
- South Carolina
If states do not conform, they will be following prior rules and treating qualified moving expenses paid in 2018 as excluded from compensation reporting or deductible by the employee at the state level.
According to Ineo:
"The expectation is that most of these states will update their conformity date in the coming months. However, many of them will probably set conformity to law effective as of Dec 31, 2017 or similar for purposes of the 2017 tax year. These same states could pass legislation this time next year setting the conformity date to Dec 31, 2018 for the 2018 tax year, which means that previously excludable expenses would be considered taxable in 2018."
In speaking with clients about their relocation expense payroll reporting, we have discussed three different options for handling these newly taxable expenses.
- Treat them as taxable, just like the federal reporting requires and assume that the state will fall in line. This is probably the most compliant option, but if there are some states that do not fall in line, then we might have to back some of those out later.
- Treat them as they had previously been treated in that state for 2017 until the state officially determines and announces the change. In this case, we would expect there will be a need to report to most of these states later.
- Hold the expenses and wait for the decision, then treat accordingly and report them. This is probably the least compliant option, but then again, the states have not made a determination.
Plus's Senior Director of Finance, Angela Sieber says, "In considering these three options, consider the level of risk your company is comfortable with as the third option is really not all that compliant. From a compliancy perspective, the first option assumes that the states will fall in line and then your reporting will be accurate and complete. The second option assumes that the state will hold to the previous treatment for the newly taxable relocation expenses."
There are already a few states that have passed, or are in the process of passing, legislation that will change the IRC conformity date. The expectation is that most of these states will update their conformity date in the coming months. However, many of them will probably set conformity to law effective as of Dec 31, 2017 or similar for purposes of the 2017 tax year. These same states could pass legislation this time next year setting the conformity date to Dec 31, 2018 for the 2018 tax year, which means that previously excludable expenses would be considered taxable in 2018.