Proposed Federal Provision Could Hurt Sales of Incentives, Awards

As political leaders look for ways to offset the costs of tax cuts, advertising specialties have once again come under fire. A provision in the U.S. House of Representatives’ proposed tax plan could have a major impact on the promotional products industry, specifically for awards and incentives providers.

The proposed legislation includes the repeal of a favorable tax exclusion given to safety and service awards under 274(j) of the tax code. Under the current law, employee achievement awards are excluded from employees’ income. “To qualify for the tax exclusion, an employee achievement award must be given in recognition of the employee’s length of service or safety achievement at a ceremony that is a meaningful presentation,” the code states. “Furthermore, the conditions and circumstances cannot suggest a significant likelihood that the payment is disguised compensation.”

Under Section 1403 in the Committee on Ways and Means’ Tax Cuts and Job Acts summary, the new provision would consider employee achievement awards as income for employees, making them taxable compensation. It would also limit the employer’s ability to write off such awards as tax deductions. As a result of the provision, federal revenues would increase by $3.8 billion between 2018 and 2027, the Joint Committee on Taxation (JTC) estimates.

If the provision passes, it could prove a difficult blow to industry distributors – more than a third of which (35%) currently sell incentive programs, according to a Counselor survey earlier this year. Nearly all distributors agree that the programs work, while 96% believe the initiatives allow them to forge firmer ties with clients. Ninety-three percent believe incentive programs provide customers with good ROI, and 80% agree that clients are interested in hearing about incentive programs. Meanwhile, 72% agree that incentive programs are a growing part of their business.

Organizations such as Incentive Federation Inc. (IFI) and the Incentive Marketing Association (IMA) have increased their lobbying efforts in an attempt to educate elected officials on the benefits of maintaining the favorable exclusion.

“We believe if this is repealed, companies will think it’s not worth the trouble of worrying about gifts and will just give cash to their employees instead,” Steve Slagle, managing director of IFI, told Counselor. “These incentive programs have been in place for many years, and they’ve been proven to contribute to a more productive workforce and safer environment. If we do away with those awards, we could lose those advantages.”

While the House is considering nixing the award/incentive exclusion, the Senate’s tax reform proposal does not propose a repeal of the measure, Slagle says. If that plan was to pass, employee achievement awards and incentives would continue to be excluded from the recipient’s income – an outcome that distributors clearly desire. Going forward, the IFI and IMA plan to carry out a grassroots writing campaign and coordinated visit to Capitol Hill, urging political leaders to abandon the repeal measures.

IFI reports that 84% of U.S. businesses participate annually in non-cash incentives like award points, gift cards, travel and merchandise. Participating businesses spend a total of $90 billion annually.