Before the Tax Cuts and Jobs Act, individuals who itemized their deductions could deduct certain miscellaneous itemized deductions to the extent that those deductions exceed 2% of their adjusted gross income (AGI). These deductions included unreimbursed employee business expenses, such as unreimbursed transportation, travel, business meals and entertainment, subscriptions to professional journals, union and professional dues, and professional uniforms.
Under the new law, miscellaneous itemized deductions are disallowed after December 31, 2017.
So what does this mean for those employees who incur these costs in performing services for their employer?
They may be out of luck. Let’s say an employee earns $60,000 in wages and incurs $2,500 in business related expenses such as travel, insurance, and subscriptions. The employee is taxed on the full $60,000 and the $2,500 out of pocket expense is not deductible.
Reimbursement under an accountable plan
Employers who don’t reimburse employees for legitimate business expenses under an accountable plan should consider the effects of this practice. Employers can generally provide employees with the same real compensation and a lower taxable income if they provide some of the compensation in the form of reimbursement of business expenses under an accountable plan. So, if the employee in the example above was paid $2,500 less (making his earnings $57,500), but was separately reimbursed for his $2,500 of business expenses under an accountable plan, he would have a lower taxable income with the same actual compensation because his $2,500 of reimbursement wouldn’t be included in income.
If you incur significant employee business expenses, talk to your employer about establishing an accountable plan. Doing so can save the employee taxes with little impact to the employer.
We’ve got your back
At KRS, we’ve been tracking tax reform legislation closely and are ready to assist you in your tax planning and preparation now that the Tax Cut and Jobs Act is finally signed into law. Don’t lose sleep wondering what impact the new laws will have on you, your family, or your business. Contact me at 201.655.7411 or [email protected].