Tax cuts were the headlining feature in the sweeping tax reform law that went into effect at the beginning of the year. There are other provisions, though, of the Tax Cuts and Jobs Act that could negatively impact employees’ paychecks.
Prior to enactment of the law on Jan. 1, 2018, employees were allowed to deduct unreimbursed business expenses if they exceeded 2 percent of their adjusted gross income. Presumably, when the TCJA expires after 2025, this once again will be the case.
In the meantime, though, deductions for the following job-related expenses will not be allowed:
- Required uniforms;
- Travel and costs;
- Business meals and entertainment;
- Union and professional dues; and
- Continuing education courses.
As an employer, there is one tool you can use to help employees recover the loss of not being able to take the deduction: Establish an “accountable plan.”
An accountable plan – also known as employee expense reimbursement – is a formal arrangement where the employer provides an advance payment or allowance for certain business expenses. This advance is not considered income and is not reported on the employee’s W-2.
You might consider reducing your employees’ gross salary to accommodate for the advance. In other words, think of an employee who earns $55,000 a year, but $5,000 of that was to help cover the cost of business expenses that he or she had been able to deduct on income taxes. It may be more beneficial for the employee to earn $50,000 and not pay taxes on the extra $5,000, yet still receive the benefit of those business expenses being covered through an accountable plan.
While the employee cannot deduct unreimbursed business expenses, the expense reimbursements made by the employer to the employee are deductible as a business expense.
For the IRS to recognize an accountable plan, however, it must be formalized and comply with the three following rules:
- Advances must be for expenses incurred in the course of normal business;
- Expenses must be adequately accounted for within a reasonable amount of time; and
- Any excess reimbursement or allowance must be returned within a reasonable time period.
We recommend creating an expense worksheet for your employees to complete when accounting for using any portion of an advance payment that includes the date, the purpose, and the location, as well as the requirement that invoices and/or receipts are included.
If you have any questions or need more information about whether an accountable plan is beneficial for your employees, please give us a call.