The Effect of the Tax Cuts and Jobs Act on Employee Reimbursement

Are your employees reimbursed for work-related travel expenses? If not, you might want to reconsider. Changes under the Tax Cuts and Jobs Act make reimbursements even more attractive to employees.

The new tax code implemented significant changes to moving and travel expenses, including business-related travel expenses incurred by employees. Under the previous law, work-related travel expenses that weren’t reimbursed were generally deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. However, many employees weren’t able to take advantage of the deduction because they a) didn’t itemize deductions, or b) didn’t have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income (AGI) floor that applied.

With the new tax code, business travel is still entirely deductible, but not by individual taxpayers because miscellaneous itemized deductions, including employee business expenses, are no longer permitted to be claimed on individual tax returns. Instead, only businesses are able to deduct these expenses, which is why business travel expense reimbursements are now more significant to current employees and more attractive to prospective employees.

In order to be deductible, travel expenses must be valid business expenses and the reimbursements must adhere to IRS rules – either with an accountable plan or the per diem method.

Accountable Plan

Employee expenses reimbursed under an employer’s accountable plan do not contribute to the employee’s income. The accountable plan is a formal agreement to advance, reimburse or grant allowances for business expenses. To qualify as an accountable plan, it must meet the following criteria:

  • Payments must be for “ordinary and necessary” business expenses
  • Employees must substantiate these expenses (including amounts, times, and places) monthly
  • Employees must return any advance or allowances they can’t substantiate within a reasonable time, typically 120 days

Plans that fail to meet these guidelines will be treated by the IRS as “non-accountable”,

and reimbursements will be included in the employee’s gross income as taxable wages subject to withholding and employment taxes (employer and employee).

Per Diem

In some cases, the per diem method may be used. Instead of tracking actual business travel expenses, employers use IRS tables to determine reimbursements for lodging, meal, and incidental expenses. Substantiation of time, place, and amount must still be provided, and the IRS imposes heavy penalties on businesses that routinely pay employees more than the appropriate per diem amount.

If you have any questions about the TCJA’s impact on your business, please feel free to reach out to me at sreed@mkrcpas-staging.mkrhoym8-liquidwebsites.com.

How to Determine if Your Taxes Will Increase for the 2019 Tax-Filing Season

President Trump signed the Tax Cuts and Jobs Act in December of last year, but the income tax credits, deductions, and individual tax rates aren’t applicable until the 2019 tax-filing season. Various factors, such as your tax bracket, can influence whether your taxes will increase under the new tax code. Below are some indicators that could signal an increase on your tax bill.

Do You Have a Large Family?

The new tax code eliminated personal and dependent exemption deductions, which was estimated to have been $4,150 each in 2018 under previous law. However, standard deductions were nearly doubled. For 2018-2025 the deductions are as follows:

  • $12,000 for single (previously $6,350)
  • $24,000 for joint-filing marries couples (previously $12,700)
  • $18,000 for heads of households (previously $9,350)

The elimination of dependent exemptions hurts some families and benefits others. Large families, who don’t benefit from increased standard deductions, will be hit the hardest.

Are You an Average Taxpayer?

If you have a conventional job, file a W-2, and don’t own a lot of property or foreign investments, your taxes won’t likely increase. Instead, you should see a modest decrease as a result of lower tax rates, increased standard deduction, and an increased child tax credit. Despite this, however, there are thousands of potential tax situations that could affect the average taxpayer differently (i.e. a wealthier couple with children who itemize state and local taxes would be limited to a $10,000 deduction under the new law – a loss of $20,000 in deductions – and would likely have higher taxes under the new tax code).

Are You Withholding Enough from Your Paycheck?

The IRS changed the tax withholding tables back in February. The tables are calculated by how much income you earn and the number of allowances you claim. If you aren’t withholding enough from your paycheck, you could end up owing taxes. Check the tax withholding tables on IRS.gov to determine how much income tax should be withheld from your paycheck.

Do You Have Older Children?

The new tax code increases the child tax credit from $1,000 to $2,000 per child under the age of 17. Taxpayers with children over 17 only receive a $500 tax credit.

Do You Have High Property Taxes?

Under prior law you could claim an itemized deduction for an unlimited amount of personal state and local income and property taxes. So, a big property tax bill could be completely deducted if you itemized. However, under the new tax code, itemized deductions for personal state and local property taxes and personal state and local income taxes are capped at $10,000 ($5,000 if you use married filing separate status).

Even considering the above factors, with the myriad of potential tax circumstances and the complexity of the changes implemented by the Tax Cuts and Jobs Act, it’s difficult to predict how your taxes will be affected until you run the numbers.

If you have any questions about how to plan for your 2018 tax return, please feel free to contact me at jmiller@mkrcpas-staging.mkrhoym8-liquidwebsites.com.

Why American Workers Could See an Increase in Tax Refunds Next Year

The majority of American taxpayers typically receive a refund from their federal tax returns, and in 2019 those refunds could increase by 26 percent, which is higher than previous years.

The jump in expected refunds is most likely a result of the recent tax overhaul that cut personal income tax rates so that workers can keep more of their income. Theoretically, such a change in taxes should prompt American workers to adjust their withholding rates accordingly through a Form W-4 with their employer. However, research shows that roughly 75 percent of tax payers, who historically over withhold from their paychecks anyway, only partially adjust those rates when new tax laws are introduced, or they don’t adjust them at all. This means that even more taxes are withheld from their paychecks than necessary, which results in a heftier refund.

The prospect of a bigger tax refund is enticing, and tax refunds are typically used to boost savings, pay down debt, and pay for vacations. But for those Americans who fall within the 75 percent of workers living paycheck to paycheck with little to no money in savings, over withholding is probably not the best move.

If Americans withhold more than necessary from their paychecks, they have less funds to apply to everyday expenses, financial goals, and life emergencies that pop up. If you are someone who might be over withholding and could benefit from an increase in your paycheck rather than waiting to see that money in your tax refund, see about submitting a new Form W-4 with your employer.

How to Roll Over a 401(k) Plan When You Change Jobs

When you accept a new job with a new company, you need to decide what to do with the money in your 401(k) plan. Here are your options.

1. Leave the money in your former employer’s 401(k) plan

While this is typically an option, and your funds will continue to grow tax-deferred, it may not be the best option. For starters, once you move to your new place of employment, you’re no longer able to contribute to it. Another possible deterrent is the fact that your former employer could switch 401(k) providers or get bought out by a different company. Both scenarios would potentially leave you in the dark in regards to your account number or login information. However, if your new employer requires employees to work a certain length of time at the company before permitting them to partake in the 401(k) plan, leaving your 401(k) funds with your former employer temporarily might be a good game plan.

2. Roll your 401(k) to your new employer’s plan

If your new employer allows rollovers, you can have your 401(k) funds directly transferred to your new employer’s plan. This is called a “trustee-to-trustee” transfer: assets from one trustee or custodian of a retirement savings plan are transferred to the trustee or custodian of another retirement savings plan. By having your 401(k) funds directly transferred following federal rollover rules, you’ll avoid having federal income tax withheld, and your money will be easier to manage in one account. You can also have the funds transferred to a new or existing IRA.

3. Transfer your plan via an indirect rollover

Another possible alternative is to roll the funds over to another employer-sponsored retirement plan by having your 401(k) distribution check made out to you, and then depositing the funds to a new retirement savings plan. However, this particular move will require that 20 percent of the taxable portion of your distribution is withheld for federal income taxes. And if you wait beyond 60 days to redeposit the funds, the full amount of your distribution will be taxable.

Whichever way you choose to move forward with your 401(k) plan, you should be aware of rollover fees. Typically the fee is only a minimal one-time fee, but it’s worth checking in with your 401(k) provider to discuss this as well as any other questions you might have.

Top Tax Write-Offs for the Self-Employed

Understanding self-employment taxes can be intimidating, but it’s important to educate yourself so you don’t miss out on deductions that can lower your tax bill. Below is a list of 15 self-employment tax deductions you may be eligible for as a freelancer or a self-employed individual.

1. Self-employment tax deduction

Self-employment tax is the portion of Medicare and Social Security taxes that self-employed individuals are required to pay, but you can claim 50% of this as an income tax deduction. For example, a $1,000 self-employment tax payment reduces taxable income by $500.

2. Qualified Business Income (QBI) Deduction

As of January 1, 2018, self-employed taxpayers can deduct generally 20% of their qualified business income from qualified partnerships, S corporations, and sole proprietorships.

3. Home Office Deduction

If your home office is your primary place of business – and used solely for your business – you are permitted to deduct it from your taxes. You can also deduct a percentage of household expenses such as electricity, gas, water, trash, cleaning services, and certain repairs to the home.

4. Retirement Plans

If you use a qualified retirement plan, such as a 401(k), an IRA, or a simplified employee pension (SEP), you are able to deduct your contributions to that plan.

5. Office Supplies

Provided they are used solely for your business, materials such as tools, basic office supplies, and machinery (including service expenses) may be deducted.

6. Depreciation

Capital expenses that experience the gradual loss of value (particularly business equipment or buildings) through increasing age, natural wear and tear, or deterioration may be deducted if they are used to generate income for your business.

7. Educational Expenses

Business-related educational expenses, such as continuing education classes, seminars and conferences, conventions and trade shows, and subscriptions and dues for industry organizations can all be deducted.

8. Health Insurance

If you are self-employed or own more than 2% of your S Corporation, you can deduct health insurance premiums for yourself and any dependents under the age of 27.

9. Advertising and Promotion

Any materials or services used to promote your business, such as business cards, web hosting, full media advertisements, etc. are deductible.

10. Internet Fees and Communication Expenses

Internet costs can be deducted, but only the percentage of time that it’s used for business purposes. Cell phone services also may be deducted in the proportion that it relates to business usage. To keep the personal vs. business line clear, it’s recommended to have separate computers and phones for business when possible.

11. Mileage

If you use your car for your business, you can take a standard mileage deduction, or take a deduction based on actual costs of fuel, maintenance, licensing, and depreciation. Some public transportation expenses are also deductible. Good record and receipt keeping as proof of business is key here.

12. Bank Fees and Interest Charges

As long as your business bank account is separate from your personal account, some bank fees connected to your business account may be deductible. Likewise, you can deduct interest on credit card balances and loans that are directly linked to your business.

13. Travel

Some business travel expenses can be deducted by 100% if they occur away from your home office and are considered necessary. Under the new Tax Cuts and Jobs Act, certain entertainment write-offs have been removed, but the 50% deduction on food and beverage expenses is still applicable.

14. Security System

If you work from a home office, you can deduct a percent of the expenses of a total home security system, and the purchase and installation of the system can be included when calculating depreciation.

15. Moving Expenses

If you move more than 50 miles from your location for business purposes, you are able to deduct most incurring expenses, such as transportation, packing, and utility connection fees.

How the Tax Cuts and Jobs Act Could Affect Your Business

As of December 20, 2017, the new tax laws were officially signed into law, ushering in a variety of cuts and changes for individuals and businesses alike. While there has been much talk around how the new laws will impact individual taxpayers and families of all income levels, it is also vital to consider how small businesses, startups and corporations will be affected.

Individual taxpayers will see a decrease in their income tax rate, a reduction of itemized deductions, a doubling of the standard deduction, and changes to elder care, child and business taxes. The Alternative Minimum Tax will remain for individuals and corporations alike, but the affected income bracket has been raised: $70,300 for single filers and $109,400 for joint filers.

So the question remains, will businesses stand to reap tax benefits for the new code? Undoubtedly. The real unknown is what businesses will do with the benefits they may reap.

What tax deductions can businesses expect then? A main provision of the plan is the lowering of the corporate tax rate from 35% to 21% in 2018, as well as lowering the income tax at almost every level for now. Corporations will be able to deduct state and local taxes, and estate tax exemptions will double, assisting the 1% who pay estate taxes while providing roughly 17 billion in taxes. For small business owners, they will be able to deduct the cost of depreciable assets in a single year rather than amortizing them over several years, which will hopefully stimulate investment and growth.

Under our current tax system, multinational taxpayers are taxed on any income earned overseas when those profits are brought back to the United States. But, the new system will not tax foreign profit. The intent here is to motivate those business owners to bring that money back overseas, reinvesting it in the US economy rather than allowing it sit overseas and aid another nation’s economy.

The new code is operating under a supply-side economics theory, which strives to invigorate economic growth across the nation for both consumers and businesses. The objective is to provide various tax deductions, placing more money in consumer’s wallets and ideally stimulate spending. The combination of lower taxes and a swell in spending on products and services is designed to allow employers to strengthen their workforce and create more jobs.

If business owners do reap benefits from the changes, any increased income or an improvement in sales should be viewed as an opportunity to develop, diversify and enhance their businesses, which would support the greater American economy and our nation.