The proposed U.S. tax reform, if approved, will have significant impact on corporate domestic relocation programs. Under this reform, certain benefit payments that were previously considered excludable from employee income if paid by the employer would become taxable. These expenses fall under 3 categories as follows:
• Household Goods Moving Expenses
• Storage Expenses
• Final Move Travel Expenses
With moving expenses no longer receiving preferential tax treatment, several long-standing tenets of relocation taxation, including the “50-mile distance test” and the “39-week rule” would be dissolved. Of additional interest to corporate relocation managers and mobile employees are changes to the treatment of capital gains on the sale of a primary residence which impose more stringent requirements to be considered excludable.
Although these reforms will likely result in an increase in mobility costs for most companies, workforce mobility will still remain a vital tool for companies to grow their business and attract and develop talent. With that in mind, let’s take a look at one example of how these changes will affect the cost of a move.
The average cost to ship household goods (according to research by Worldwide ERC) is $11,583. With this expense no longer deductible, companies would find it more costly to provide gross-up tax assistance, even though the cost may continue to be deducted as a business expense. For employees, the overall cost of the benefit (including gross-up cost estimated between 60%-70% on average) will be added to their income, increasing the likelihood of being subject to higher tax bracket(s).
To remain an informed consultant to your company’s senior leadership, you’ll need to be armed with data on the long-term and short-term consequences of these proposed changes. Our tax firm, Weichert Mobility Tax Services, is currently monitoring the evolution of this reform and is working on a detailed set of recommendations for our clients.
In the meantime, here are some of the ways these reforms will impact key stakeholders:
Impact to Companies
• Increased costs related to additional gross-up on benefits.
• Without tax deductions on moving expenses, employees may be more reluctant to apply for positions that require relocation. A robust policy with tax protection will be key to overcoming resistance.
• A qualified homesale program will be the most effective way to reduce the tax gross up bite while offering the kind of benefits most valuable to employees.
Impact to Employees
• Increased possibility of being placed in a higher tax bracket.
• Employees may be more reluctant to move if they are not fully supported financially or if benefits are reduced.
• Employees considering a relocation may be less inclined to move to states with high property or income taxes.
To support workforce agility and meet the talent deployment and development needs of your organization, mobility managers should proactively prepare an addendum outlining additional tax benefits the company will subsidize or cover. These may include:
• grossing up previously tax deductible expenses
• covering the potential increase in tax burden resulting from limited deductibility of state and local income taxes
• protecting the employee in situations that push them into a higher tax bracket or prevent them from utilizing credits (like the childcare credit)
Mobility managers are also well-advised to update cost estimates for each policy tier and advise managers so they’ll better understand the investments they are making in mobile talent and can accurately accrue for these additional expenses.
Given the significant uncertainty associated with this tax reform bill, one of the most important benefits you might provide is tax counseling and tax preparation assistance. This will go a long way toward overcoming the financial fears and anxiety associated with a move.
A Mobility Manager’s Checklist for the Proposed Tax Reform
Develop an advisory notice or policy addendum that advises employees in the middle of a move about the change in law and any impact it may have on their situation. Consider requiring employee signatures to ensure confirmation.
Review policy language for changes to wording for future moves.
Begin discussion with leadership including finance; be prepared with relevant data.
Conduct a cost analysis for moves already in progress; companies may choose to absorb the cost as employees were authorized with the expectation that they would receive tax assistance for benefits.
Prepare an impact analysis for future moves. If the company cannot absorb the increased cost, how will this affect the company (less training through rotations, eliminate intern program, etc.)?
Educate other stakeholders (those who authorize moves) on the potential increased tax cost impact and advise of next steps.
As questions come up, consult with your Client Service Director so that you can cascade information within your organization.
Consider setting up a hotline or email for employees to ask questions.
Consider tax planning assistance to employees that are undergoing a move and were counseled about the tax assistance under a different approach. This is the group that will be immediately impacted by the changes and will be a source of information to other employees.
At the end of the day, the best defense against shifting costs—and the most cost-effective way to provide relocation benefits—is by maintaining a compliant homesale program. Over the years, we’ve conducted numerous focus groups and stakeholder surveys that confirm just how much employees value the certainty of knowing they have a buyer for their home and can access equity to finance the purchase of a new home without having to worry about the expense reimbursements or taxes on those reimbursements.
No doubt, moving forward, homesale benefits are likely to become even more important as a tax-favorable way to provide benefits.
• IRS Publication, Moving Expenses
• BDO Federal Tax Alert, December 13, 2017
• Tax Reform Update: Moving Expense Deduction Proposed for Repeal, Worldwide ERC
• Worldwide ERC, U.S. Transfer Activity, Policy & Cost Survey 2016