2018 US Tax Reform Update: What Companies Need to Know

As we discussed in a SIRVA webinar earlier this year, the 2017 Tax Cuts and Jobs Act enacted by the Federal Government with an effective date of the 1st of January 2018, has significantly impacted the relocation industry.  The tax reform has generated a need for organisations to review the tax (gross-up) support that is provided to relocating employees, specifically with regard to:

Tax Excludable Expenses - Various tax expenses that were previously excludable are now taxable, including:

• Household goods shipment 
• First 30 days of storage
• Pet shipment
• Car shipment
• Final trip expenses ‒ accommodation, airfare and mileage to the IRS tax excludable moving rate  

Tax Deductible Expenses – Some previously tax-deductible expenses are no longer deductible, such as state income, property and, if elected, sales taxes in excess of US$10,000 (US$5,000 for married individuals filing separately). Home loan interest and the real estate tax portions of the duplicate housing benefit will still be deductible, but the cap has been reduced.

The changes above are specific to the federal treatment of defined relocation expenses, but each state has the option to adopt an alternative approach from the federal guidelines. 

Household Goods and Final Move Expenses are Taxable at the Federal Level, but State Taxation May Not Follow Suit

As of the 1st January 2018, tax reforms meant that employees were no longer able to deduct household goods and final move expenses at the federal level. States, however, began reviewing their own positions on whether or not they would be following suit.

As of the publish date of this blog post, several states have decided not to follow the 2018 Federal Tax Code, and will still consider household goods and final move expenses as excludable expenses. These states include:

Additional states are still assessing their alignment with the federal tax approach, and will provide guidance by the end of the year.  These states include:

Is Your RMC Client Finance Team Ready?

SIRVA’s Client Finance Team continues to work closely with our tax provider and subject matter experts to ensure that we are up to date with all 2017 US Tax Cuts and Jobs Act changes, so we can identify the impact on the processing and reporting of relocation expenses. This includes decisions made at the state level.

Regardless of the RMC being utilised, there are key items that business stakeholders should be aware of as they prepare to address this year’s reforms:

• Payroll System Updates – In an effort to provide two different methodologies to support federal and state taxability differences, payroll suppliers are in the process of updating their software. It will take time -  some say as late as October -  for all suppliers to complete the updates and roll them out to their customers. Coordination and communication between all parties will be key to ensure that systems can correctly capture the taxability of these expenses.
• Payroll Service Providers – Company stakeholders should be proactive in working with their payroll providers to ensure that their systems can receive differences between federal and state taxable incomes within the same transaction.
• Over Gross Up – Until systems can provide two methods of taxability, in-process employees may be overly grossed up if their local state decides to make household goods and final move expenses excludable. Once system functionality has been updated, your RMC will need time to make these updates at the client and employee level.  
• Payroll Reporting – It’s important to keep the line of communication open between your RMC finance team and your payroll department to ensure that spend data is provided in a format that addresses any changes that occur on the client side.
• Year End Planning – It will be important to make sure that year-end planning calls happen early this year, to allow for planning around any changes at the state level which would affect costs already reported to payroll. There may also be a need for an additional reconciliation at year end to address any changes that may have occurred at the state level. There may be fees associated with this reconciliation.
• True Up – Given the extensive changes brought about by this year’s tax reform, it’s advisable for all companies and their payroll departments to conduct a year-end true-up to account for all tax law changes this year.
• New Tax Law Education – SIRVA has enlisted the help of a tax law specialist to augment our knowledge on the 2018 tax reform. This year, more than ever, we believe RMCs should do everything they can to gain additional education  in an effort to keep transferees up to date, address issues and answer any questions they may have.

“Next steps” for Company Stakeholders

Communication and awareness will be crucial for companies when it comes to staying on top of this year’s tax reforms. Decision makers will benefit greatly by connecting with their RMC contacts early to discuss the steps that both parties will need to take for an effective transition. Finally, since state decisions may not be determined until close to year end (and payroll, RMC and company system updates will take time to roll out), helping internal stakeholders build realistic timelines will be critical.

Internally, company decision makers are advised to:

• Review their populations to better understand the overall impacts the tax reform may have on their relocation programmes
• Communicate to their payroll departments that a year-end true up will be required if they want to ensure that they have not overpaid gross-ups (As mentioned above, state guidance may not be provided until late in the year, so timing may present challenges)
• Create Awareness amongst their internal stakeholders that while their RMC may have updated its systems to reflect state decisions regarding gross ups, their payroll provider’s system must also be up to date to accept instructions from their RMC.  W2cs may be required if their payroll provider’s system is NOT ready to accept the correct gross-up instructions.