The Tax Cuts and Jobs Act, Congress’ tax reform bill, has passed in the House. The Senate is now tackling its version of the bill. In the end, these two versions will need to be combined for a single bill to emerge with the final language for tax reform in 2017.
The process represents the legislative branch’s best chance at passing meaningful tax reform in 30 years. While the legislation is expected to stimulate the economy and reduce tax burdens for many individuals and businesses (which should help the private club industry), there are several provisions that could pose challenges to club staff, executives and members. Here are three ways the tax reform bill could affect your club.
The Tax Bill May Reduce Take-Home Pay for Club Employees
The Tax Cuts and Jobs Act removes the $4,050 personal exemption that many workers use. By taking advantage of this personal exemption, club employees have approximately $335 of their gross pay exempt from taxation each month. By removing this exemption, those funds will now be taxed.
While this tax reform legislation reduces income tax rates for all employees, eliminating the personal exemption may mean their net deposit could be less. Without the personal exemption, their taxable income will be larger, and that sum will be taxed at the new rate.
The key for club employees will be whether the lower income tax rate on more income will be less than the personal exemption and a higher tax rate on less income. If it is not, then those employees will see a smaller net deposit.
Club management and HR departments should be prepared to answer questions about potential net pay changes to employees and ensure they understand this is not something the club did. In the end, many club employees should see a larger refund at the end of the year, but that will not change the fact that their paycheck could have less money in it.
Changes Could Come to Nonqualified Deferred Compensation Plans for Senior Executives
Clubs that utilize nonqualified deferred compensation plans (commonly referred to as Section 457(b) plans) for their senior staff will now find their employees’ income subject to immediate taxation rather than having it deferred. If clubs provide this benefit, club leaders will need to begin re-evaluating this type of compensation package to minimize the tax liability to senior leadership employees.
The good news is that this change to 457(b) plans was included only in the House passed version of the Tax Cuts and Jobs Act. It was not included in the Senate’s version of the bill. As the two bills are merged into one, we will continue to focus on this potential change.
Members May Use the Club Less for Golf and a Meal
Under the Tax Cuts and Jobs Act, the business meals and entertainment deduction has been changed, which may change how members use the club.
Under current law, 50 percent of business meals and entertainment costs may be deducted as an ordinary and necessary business expense. Putting aside the question of whether the club should be used for business purposes, the new bill prohibits any deduction for entertainment costs at a club. As the bill stands now, only 50 percent of a business meal—say after a round of golf—would be deductible, but not the cost of the round. This provision could impact some clubs as their members may not use the club as much after the removal of this deduction.
This change may impact how members use the club. Without any deduction of business entertainment costs, members may be less inclined to use the club less for lunch and golf with clients, reducing this revenue stream to the club.
Clubs Should Know
In all, the Tax Cuts and Jobs Act should reduce tax burdens for many businesses and individuals. That should benefit the economy and private clubs. However, these three changes may pose specific challenges to members of the club community. Clubs should be aware of and be prepared to address these changes.
The National Club Association will continue to closely monitor this bill and give updates on any changes. If you have any questions regarding this legislation, please contact NCA Vice President of Government Relations & General Counsel, Brad Steele at [email protected] or 202-822-9822.
Phillip Mike is NCA’s senior communications manager.