How the Tax Cuts and Jobs Act Affects Employee Reimbursement
How the Tax Cuts and Jobs Act Affects Employee Reimbursement
As a result of changes made under the Tax Cuts and Jobs Act, employee reimbursements for business-related travel expenses are more appealing than ever.
No longer are these expenses deductible from an employee’s individual tax return as a miscellaneous deduction, but work-related travel expenses are still able to be reimbursed to employees. This could be viewed as a positive change for employees who weren’t able to take advantage of the deduction under the previous law. This was either because they didn’t itemize or they didn’t have enough miscellaneous itemized expenses to exceed the necessary 2% of adjusted gross income (AGI) floor.
Business travel is still fully deductible under the new tax code – just not by the individual taxpayer (miscellaneous itemized deductions, including business expenses, are no longer accepted as claims on individual tax returns). Only businesses are able to deduct these expenses now, which means employee reimbursement for business-related travel expenses are more attractive to both current and potential employees.
For businesses looking to deduct work-related travel expenses, they must first qualify as credible business expenses, and the reimbursements must comply by IRS rules – either with an accountable plan or the per diem method.
Under an accountable plan – a formal provision to advance, reimburse, or grant allowances for business expenses – reimbursed employee travel expenses are not counted as part of the employee’s income. To qualify as an accountable plan, the agreement must stipulate that payments are for “ordinary and necessary” business expenses; employees must substantiate the expenses (times, places, and amounts) on a monthly basis; and employees must return any advance or allowances they can’t substantiate within a practical timeframe, generally within 120 days. If these guidelines aren’t met, the IRS will treat the plan as “non-accountable”. Should this be the case, reimbursements will be added to the employee’s gross income as taxable wages subject to withholding and employment taxes (employer and employee).
If using the per diem method, employers use IRS tables to determine reimbursements for lodging, meal, and incidental expenses. Just like with an accountable plan, times, places, and amounts must still be substantiated. The IRS enforces steep penalties on businesses that frequently pay employees more than the legitimate per diem amount.
If your business doesn’t currently offer reimbursement to employees for business-related travel expenses as a job perk, now is the time to rethink your strategy.
If you have any questions about the TCJA’s impact on your business, please feel free to reach out to me at [email protected].
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