Business Meals and Entertainment: Business meals would be capped at $25 a person for all meals, plus 50% of the excess. The proposal would impose no limit on the deductibility of meals furnished on company premises, and parties for employees could be written off, too. But all business-entertainment deductions, including sports tickets, fishing trips, and country-club dues, would be abolished.
Employee Awards: Current law treats most employee merit awards as nontaxable gifts. But Reagan wants these prizes reported as compensation, unless they fall into what is known as the "de minimis" category. These are items that are too insignificant to report, including free coffee, free holiday food, free photocopies, and the like.
Health Insurance: Employer contributions to health insurance plans would be included in the employee's taxable income, up to $120 per year for individual coverage, or $300 for family coverage. For small companies, this change would mainly mean additional paperwork.
Retirement and Profit-Sharing: The Reagan Administration's tax plan would impose a 20% excise tax on withdrawals from tax-sheltered pension plans prior to retirement, while disallowing favorable capital-gains treatment and 10-year averaging of lump-sum program withdrawals. In addition, the plan would also cap deductible contributions to profit-sharing and stock-bonus plans at 15% of an individual's total compensation, and would impose a new 6% excise tax on excess contributions to retirement programs.
The Reagan proposal would also deal a severe blow to 401(k) plans, a new fringe benefit that allows employees and business owners to put away a portion of their earnings for retirement and exclude that amount (plus any interest and dividends that accumulate) from current taxation. The President would cap contributions at $8,000 annually, minus any deposits made by the employee or business owner to separate individual retirement accounts. Moreover, the plan would prohibit withdrawals from 401(k)s in cases of financial hardship. "Given the President's proposal," says Steven J. Ross, general counsel for Corbel & Co., a consulting firm in Jacksonville, Fla., "employers should think twice before putting in 401(k)s."
Other retirement programs should be closely scrutinized as well. If Treasury II is enacted, employers would have to amend their pension plans to meet the law's requirements -- a process that involves expensive legal and accounting time. Some small companies may choose to dissolve their pension programs rather than cope with another round of changes. "This tax proposal is like the Chinese death of a thousand cuts," says Larry Richter, chief executive officer of Corbel. "You don't know which one is going to get you. If they keep slicing away, they may kill the entire animal."
Nondiscrimination Tests: Profit-sharing, stock bonus, pension, and annuity plans would be subject to strict new nondiscrimination tests. So would health-benefits plans, educational-assistance programs, dependent-care assistance programs, and welfare-benefit funds, such as voluntary employee beneficiary associations. The new rules would establish clear standards to ensure that benefits are not provided on a basis that is overly favorable to certain categories of employees. For example, contributions by key executives to a retirement plan could not exceed 125% of the deposits made by other employee groups.
MISCELLANEOUS
Research and Development Credit: The present credit for research and development expenditures would be extended for an additional three years (until December 31, 1988) under Treasury II. This means that companies could still deduct 25% of their increased R&D costs from their total federal tax bill. President Reagan's proposal does call for a new definition of qualified research -- one that would target research activities that are likely to result in real technological innovations. However, this new definition has not yet been written.
Albert B. Ellentuck, a partner in the Washington, D.C., office of Laventhol & Horwath, suggests that companies review their accounting systems to make certain that all R&D expenditures are recorded as such. For example, if maintenance employees spend part of their time on research equipment, Ellentuck says," an allocation of a portion of their wages would be appropriate."
Employee Stock Ownership Plans: For a decade now, Congress has been encouraging employers to set up ESOPs, and last year's Tax Reform Act was no exception. It included new rules that allow business owners to exclude from their taxable income any profits they make when they sell stock to an ESOP if the money is reinvested in other securities. The Tax Reform Act also permitted banks and other lending institutions to exclude from their taxable income half of any interest they receive from loans made to an ESOP.
Now the Administration wants to provide such incentives only in the case of ESOPs that actually give employees immediate stock-voting rights. Also, stock would have to be distributed to employees annually, not held in trust until workers retire, and would be allocated to employees based only on the first $50,000 of salary. That way, key executives would not receive a disproportionate share of stock.
Most observers think these changes stand little chance of passage, however. As Ellentuck notes, "With Russell Long (D-La.) championing this cause, you can pretty much bet that ESOPs will be left alone."
