Employee Expense Reimbursements

With the new Tax Cuts and Jobs Act, several things have changed in the tax planning world. One of the bigger changes affecting many of our clients is the elimination of the employee business expenses deduction, along with all other deductions subject to 2% of AGI. The reasoning behind removing the deduction seems to be that standard deduction is doubling, therefore, as they give they also take away. Although the overall change will benefit most taxpayers, for many pilots, OTR drivers, sales employees and others, this deduction was a main staple of their tax planning. Is there any way to recoup some of these lost tax savings? The prevailing thought at the moment points toward employer reimbursements.

Not all employers are willing to fully reimburse employee expenses. However, even a partial reimbursement of expenses is better than none at all. The majority of those claiming this deduction only received about 25%-35% tax reduction anyway, meaning they were only saving about 25-35 cents on each dollar spent. If your employer is willing to reimburse even 25%-50% of your expenses, you will likely still end up ahead.

An employer may reimburse an employee for travel, meals and entertainment expenses incurred while performing services for the employer. The reimbursement, including per diem allowances, may or may not be taxable, depending on whether or not the employer reimburses under an accountable plan or a non-accountable plan.

If expenses are reimbursed under an accountable plan, the employer may claim the expense (auto, meals, etc) and the employee may exclude the reimbursement from income. If the expenses are reimbursed under a non-accountable plan, the employer reports the reimbursement as taxable wages to the employee on Form W-2 and takes a wage expense deduction, while the employee reports the income as wages. Effective for 2018, the employee is no longer allowed to take a deduction on his or her income tax return for the expenses not reimbursed, paid out of his or her pocket, since the new tax law repealed the 2% miscellaneous itemized deductions.

So what exactly is an accountable plan? To qualify as an accountable plan, employees must do the following:

  • Have paid or incurred deductible expenses while performing services as an employee
  • Adequately account to the employer for these expenses within a reasonable period of time
  • Return any excess reimbursement or allowance within a reasonable period of time

Employers must establish the accountable plan and set in place a mechanism for employees to track expenses and return any excess reimbursement.

Any form of reimbursement that does not meet the accountable plan rules is a non-accountable plan. Any of these amounts paid must be treated as W2 wages and are subject to income tax withholding, Social Security, Medicare and unemployment taxes.

Please do not hesitate to contact us with any questions you may have regarding accountable plans. We can also help you set up an accountable plan with your business and determine how to implement it in a way that works for you.

Thank you!

-Heritage Accounting and Tax Services