Cafeteria benefit plans. With a cafeteria plan, employees choose fringe benefits from a preset menu. Under the old rules, employees could receive cash for benefits they didn't use. However, regulations proposed by the IRS last spring prohibit cash payments of the unused amounts, says Dankner of Coopers & Lybrand. What's more, the new law limits cafeteria plans to those offering cash or nontaxable benefits, such as day care and medical and life insurance. Taxable benefits, such as tuition assistance and the cost of commuting, can no longer be included in such plans.
The law provides relief from the IRS regulations with regard to existing plans, generally until January 1, 1985.
Voluntary employee benefidary assedations (VEBAs). Defined under section 501(c)(9) of the Internal Revenue Code, a VEBA is a separate account through which employees' fringe benefits are paid. The most common benefits are health and life insurance, but vacation, severance pay, and other benefits can be included, too.
In the past, the primary selling point of a VEBA was that contributions to it were fully deductible in the year they were made This rule allowed companies to prefund employee benefits and, therefore, boost current tax deductions. The new law sharply cuts back on this practice It also comes down hard on companies that have stretched the definitior of VEBAs far beyond their intended limits. The most talked about example is the abuse of severance benefits.
Under the old rules, companies would contribute as much as two times an executive's salary to a VEBA. The contribution was deducted by the company, but it was not taxed as income to the employee until the money was paid out. This didn't occur until the employee resigned or, in some cases, retired.
"That," says Alvin D. Lurie, a tax attorney in New York City and the author of a guide to VEBAs, "was seen as abusive of what severance benefits were all about." So the new law sets a ceiling on severance benefits paid through VEBAs. The figure, tied to pension rules, is currently $45,000 per person.
Although VEBAs still cannot disproportionately favor the company's officers, shareholders, and other highly compensated employees, stringent top-heavy rules were not enacted as threatened. "No matter how high the percentage of benefits going to key employees," says Lurie, "there will be no adverse statutory consequences from a top-heavy structure."
The new VEBA rules affecting timing of contributions and deductions don't take effect until 1986.
Golden parachutes. Golden parachutes are severance payments made to the management of a company that is acquired by another company. The new tax law imposes a cap on golden parachutes. The limit is three times an individual's average annual compensation over the past five years. The portion of parachutes that exceed that ceiling will be subject to a 20% excise tax, plus individual income taxes. The rules apply to golden parachutes provided for in agreements entered into or renewed after June 14, 1984.
Industrial development bonds (IDBs). State and local governments issue IDBs for many purposes -- among them, to help small companies purchase equipment and property. Small companies like tax-exempt IDBs because they carry a lower interest rate than most commercial loans.
Ironically, the new tax law imposes a cap on the amount of IDBs each state may issue at a time when small business interest in IDBs had just started to heat up. The new ceiling is $150 per resident or $200 million, whichever is greater. The move is bound to result in a sharp drop in the availability of new IDB funds.
Tax credits on used property. The law postpones scheduled increases in the amount of used property that qualifies for an investment tax credit. The ceiling remains $125,000 until 1988, instead of increasing to $150,000 in 1985.
Real estate. Old tax laws provided two mechanisms for depreciating buildings: the straight-line method and the accelerated cost recovery system (ACRS). Straight-line depreciation was the easiest. You divided the cost of the building by 15, the minimum number of years for writing off buildings, and deducted the result from your taxable income each year until you had written off the cost. The second depreciation method, ACRS, used the 15-year write-off and set the percentage of the building's cost you could deduct. The write-off or annual tax deduction was "accelerated," thus providing large deductions in the early years.
The new law changes the minimum recovery period for buildings from 15 to 18 years, except in the case of low-income housing. This provision means it will take three years longer for companies to recover their investments in buildings. The new rules apply to buildings placed in service after March 15, 1984.
Company cars. Under the old rules, if a car was used solely for business, the entire purchase price -- no matter how large -- was deductible. Your choices were to depreciate the whole amount over three years (using ACRS) or to expense up to $5,000 of the cost currently and depreciate the remainder.
You were also entitled to a 4% or 6% investment tax credit. With the 4% credit, ACRS could be applied to the full cost of the car. With the 6% credit, you had to subtract half the amount of the credit from the sum you depreciated.
If you used your automobile for a variety of purposes, the law mandated that you separate business and personal usage. And it permitted you to depreciate only that portion attributable to business.
