February 6, 2018 / 9:47 PM / a year ago

Deduction scramble helped drive U.S. wave of tax bonuses: experts

WASHINGTON/NEW YORK (Reuters) - When President Donald Trump signed into law an overhaul of the U.S. tax code in late December that slashed the corporate tax rate, managers at Southwest Airlines Co wasted no time.

FILE PHOTO: U.S. President Donald Trump sits at his desk as reporters exit after he signed sweeping tax overhaul legislation into law in the Oval Office at the White House in Washington, U.S. December 22, 2017. REUTERS/Jonathan Ernst

Within days of the law’s enactment, the Dallas-based carrier announced that because of anticipated savings under the new law, it would give $1,000 bonuses to each of its 55,000 employees.

Southwest was not alone. More than 200 companies in recent weeks have cited the tax law in declaring bonuses for at least 3 million U.S. workers, according to Americans for Tax Reform, a conservative tax activist group in Washington.

Besides being eager to offer a swift thank you to employees, Congress and Trump, companies had another reason to move so quickly on bonuses, said tax experts and corporate executives.

Bonuses are a tax deductible business expense. Since Trump’s tax overhaul reduced the corporate tax rate to 21 percent from 35 percent, a bonus deduction booked in 2017 could provide a company with tens of millions of dollars more in tax savings than one booked in 2018, depending on its size and scope.

Bonuses declared in fiscal 2017 can be claimed as 2017 deductions as long as the bonuses are paid out by mid-March 2018 for companies with calendar fiscal years, said tax experts.

“A deduction in 2017 is a lot more valuable than a deduction in 2018, because of the 14 percentage point difference in tax rates,” said Robert Delgado, head of a compensation and benefits group at audit, tax and advisory firm KPMG LLP.

At Southwest, Chief Financial Officer Tammy Romo told Reuters in an interview, “We went to work immediately over the holidays to look at our options.”

On the bonus, she said, “Because it was approved prior to the end of the year, it ended up being a deduction for 2017.”

The large corporate savings obtainable by taking a bonus deduction in 2017 instead of 2018 will not be equally available to employees earning $200,000 or less who get a bonus in 2018, said the Tax Policy Center, a nonpartisan think tank.

For them, tax will be due on bonuses and their tax rates will be only slightly lower this year than last, nowhere near the deep cut in the corporate rate, tax experts said.

Maximizing the value of deductions for bonus payments is a legitimate strategy for corporations, whose shareholders expect them to pay the lowest taxes possible.

AT&T Inc unveiled $1,000 bonuses for more than 200,000 employees on Dec. 20, the day Congress approved the law. Similar announcements followed from Comcast Corp, Walmart Inc, Kansas City Southern and other companies.

Some of the bonuses would have been awarded anyway, experts said, but the tax bill allowed employers to be more generous.

Walmart, which handed out bonuses worth $200 to $1,000 depending on years of service, routinely offers its employees quarterly performance-based bonuses. But the company described this payment as a one-time bonus set after the tax bill passed.

Steve Seelig, a compensation expert at consulting firm Willis Towers Watson, said declaring a post-tax overhaul bonus was a compelling move for companies in several ways.

“It engenders good will with their employees, it gets good press, there’s good reaction in Congress. Not only do you get all that, you get a better deduction,” he said.

To get a 2017 bonus deduction, a corporation must ensure a bonus qualifies as a “fixed and determinable” liability. This can require the board to pass a resolution authorizing a bonus payment and a message alerting employees to the plan.

“Companies are continuing to evaluate bonuses and whether it makes financial sense to pay them ... and get the deduction earlier,” said Jerry Karlin, an employer tax expert at Deloitte Tax LLP. “That’s not new. There’s just a greater economic savings this year.”

Additional reporting by Nandita Bose in New York; Editing by Kevin Drawbaugh, Sue Horton and David Gregorio

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