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

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

by | Accounting News, News, Tax, Tax Planning

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 [email protected].

How the Tax Cuts and Jobs Act Could Affect Your Business

How the Tax Cuts and Jobs Act Could Affect Your Business

by | Accounting News, Audit and Accounting, Business Consulting, News, Tax, Tax Consulting, Tax Planning

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.