The Senate and House have come to an agreement on the Tax Cuts and Jobs Act that will have only a small effect on taxation of incentives and recognition awards. The President signed the bill, which, in part impacts service (anniversary) and safety awards otherwise known as “employee achievement awards,” into law on December 20.
Currently, achievement awards are excluded from employees' taxable income if certain conditions are met. Under the final bill, in 2018, deduction for an employer and the exclusion for the employee will not apply to the employee’s receipt of “cash, gift coupons, gift certificates, vacations, meals, lodging, tickets to sporting or theater events, securities and other similar items."
“A deduction/exclusion for any other tangible property and gift certificates allowing the employee to select tangible property from a limited array of items pre-selected or pre-approved by the employer would still be allowed,” according to WorldatWork.
An example of pre-selected or pre-approved tangible property would be an award catalog arrangement provided by incentive and recognition suppliers who understand the nuances of eligible achievement awards.
The amount eligible for exclusion is based on the fair market value (FMV) of valid achievement awards.
Let's Look at the Tax Code Today to Understand What Remains in Effect
For an achievement award to be eligible for the exclusion, it must be part of an IRS “qualified plan” which means the award must be presented as part of a “meaningful presentation” and not be “disguised compensation.”
In addition, there’s a $1,600 limit per year for achievement awards given to an employee in an IRS-qualified plan ($400 for awards that aren’t qualified plan awards).
However, the exclusion doesn’t apply in these instances:
- A length-of-service award can only be tax-exempt every five years.
- A safety achievement award is not tax-exempt for a manager, administrator, clerical employee, or other professional employee.
- A safety achievement award is not tax-exempt if more than 10% of eligible employees previously received safety achievement awards during the year.
So What Actually Changed?
Little is slated to change with the exception of tightening the definition of tangible awards effective in tax years beginning after December 31, 2017.
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