Deductibility of Employee Achievement Awards under the New Tax Law
Employers have always been fond of awarding their employees for milestone achievements like hitting a certain length of service, achieving a safety goal or other similar awards. As part of the new tax reform law (Tax Cuts and Jobs Act of 2017) Congress changed the rules on the deductibility of these expenses by businesses.
Prior to 2018, the law per IRS guidance was “you can generally deduct amounts you pay to your employees as awards, whether paid in cash or property.”
Achievement awards are defined by the IRS as an item of tangible personal property that is given to an employee for a length of service or safety achievement, is awarded as part of a meaningful presentation and is awarded under conditions and circumstances that don’t create a significant likelihood of disguised pay.
Length-of-service awards are defined by the IRS as a reward for an employee after their first 5 years of employment and the employee did not receive another length-of-service award (other than one of very small value) during the same year or in any of the prior 4 years.
The deduction limit was $400 for awards that aren't qualified plan awards and $1,600 for qualified plan awards (defined as an achievement award given as part of an established written plan or program that doesn't favor highly compensated employees as to eligibility or benefits).
The new tax law did not change the basic rules listed above but it did clarify what is considered “tangible personal property” for the deduction. For tax years beginning in 2018, tangible personal property is now defined as:
“excluding cash, cash equivalents, gift cards, gift coupons or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.”
This further clarification of what is allowed to be given as an achievement award was lacking in the previous version of the law and is likely to result in changes to what awards employers give in 2018 and beyond.
The rules related to deductions for employee achievement awards can be complicated. Please consult with your professional tax advisor if you have questions on the taxability of these expenses.