IRS Clarifies Applicability of TCJA Moving Expense Provisions | Practical Law

IRS Clarifies Applicability of TCJA Moving Expense Provisions | Practical Law

The Internal Revenue Service (IRS) has clarified how amendments under the Tax Cuts and Jobs Act (TCJA) involving moving expenses apply regarding individuals who relocated in 2017 but were not reimbursed for the expenses until 2018 (IRS Notice 2018-75 (Sept. 21, 2018)).

IRS Clarifies Applicability of TCJA Moving Expense Provisions

Practical Law Legal Update w-016-7373 (Approx. 4 pages)

IRS Clarifies Applicability of TCJA Moving Expense Provisions

by Practical Law Employee Benefits & Executive Compensation
Published on 24 Sep 2018 • USA (National/Federal)
The Internal Revenue Service (IRS) has clarified how amendments under the Tax Cuts and Jobs Act (TCJA) involving moving expenses apply regarding individuals who relocated in 2017 but were not reimbursed for the expenses until 2018 (IRS Notice 2018-75 (Sept. 21, 2018)).
The IRS has clarified how changes affecting the exclusion and deduction for moving expenses under 2017 tax reform legislation apply to moving expenses incurred before 2018 (IRS Notice 2018-75 (Sept. 21, 2018) and related IRS news release). The IRS guidance addresses provisions added by the Tax Cuts and Jobs Act (TCJA) under which most employees – for an eight-year period beginning in 2018 and ending in 2025 – will not be permitted to exclude qualified moving expense reimbursements from income or deduct moving expenses (Pub. L. No. 115-97, §§ 11048 and 11049 (2017); see Practice Note, Fringe Benefits: Moving Expenses and Legal Update, Tax Reform Is Enacted, With Significant Implications for Executive Compensation and Employee Benefits).

Background

Section 132 of the Internal Revenue Code (Code) provides an exclusion from gross income for qualified moving expense reimbursements. These reimbursements consist of payments received by an individual, either directly or indirectly, from the individual's employer for expenses that:
  • Would be deductible as moving expenses under Code Section 217 if the individual had paid or incurred them directly.
  • Were not actually deducted by the individual.
(26 U.S.C. §§ 132 and 217.)
Qualified moving expense reimbursements are also excludable from wages and compensation for employment tax purposes (see Practice Note, Payroll (FICA) Taxes). The TCJA amended Code Section 132 to provide that the exclusion does not apply for tax years beginning after 2017 and before 2026, subject to an exception for US Armed Forces members on active duty who move pursuant to a military order or for a permanent change in station. The TCJA also suspended the deduction for certain moving expenses (under Code Section 217) for tax years beginning after 2017 and before 2026 – also with an exception for members of the US Armed Forces (26 U.S.C. § 217(k)). The TCJA changes applied for tax years beginning after December 31, 2017.
IRS Notice 2018-75 addresses questions regarding how the TCJA changes apply to moving expense payments or reimbursements received after December 31, 2017, for expenses resulting from moves occurring before January 1, 2018. In particular, the TCJA did not specify whether suspension of the exclusion applies to all payments or reimbursements received after December 31, 2017 (regardless of when the related move occurred), or only to payments or reimbursements for expenses incurred for moves that occurred after December 31, 2017. Notice 2018-75 addresses how employers should:
  • Pay third-party service providers after December 31, 2017, for moving services provided to individuals before January 1, 2018.
  • Reimburse individuals after December 31, 2017, for expenses incurred in connection with a move the individual made before January 1, 2018.

Treatment of Reimbursements for 2017 Moving Expenses

Under Notice 2018-75, the TCJA's suspension of the moving expenses exclusion applies only to payments or reimbursements for expenses incurred in connection with moves that occurred after December 31, 2017. The guidance applies if:
  • An individual moved in 2017.
  • Expenses for the move would have been deductible by the individual under the pre-TCJA version of Code Section 217 if they had been paid directly by the individual in 2017.
  • The individual did not actually deduct the moving expenses.
In this situation, amounts received (directly or indirectly) in 2018 by the individual from an employer as payment for or reimbursement of the expenses are qualified moving expense reimbursements. This means that:
  • Payment or reimbursement of the expenses is excludable from income as a qualified moving expense reimbursement (under Code Section 132) (26 U.S.C. § 132).
  • The amount is both excludable from wages for employment tax purposes and from compensation (under Code Section 3231(e)(5)) (26 U.S.C. § 3231(e)(5)).

Employers May Need to Adjust Withholdings

The IRS recognized in its guidance that some employers may have already:
  • Included amounts for moves occurring in 2017 in individuals' wages or compensation for purposes of federal employment taxes.
  • Withheld and paid federal employment taxes on these amounts.
Employers that have done so should use the Code's adjustment or refund claim procedures to correct the overpayment of federal employment taxes on these amounts (26 U.S.C. §§ 6402 and 6413; Rev. Rul. 2009-39). For more information on these procedures, see:

Practical Impact

In limiting the reach of the TCJA amendments (which were enacted toward the very end of 2017), the IRS's guidance aligns with the expectations of individuals who relocated during 2017 but who were not reimbursed until 2018 – and would not have anticipated that the reimbursements would become taxable if received in 2018 rather than 2017.
For additional IRS implementing guidance concerning tax reform, see the IRS TCJA webpage.