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Businesses Should Plan to Reimburse for Employee Expenses

Prior to the Tax Cuts and Jobs Act, which went into effect January 1, 2018, unreimbursed work-related expenses were generally deductible on an employee’s individual tax return as a miscellaneous itemized deduction (Schedule A) if they exceeded 2% of an individual’s AGI. Starting in 2018, these deductions will be eliminated for tax years through 2025. This includes unreimbursed job-related expenses such as:

Instead, businesses can claim a deduction for employee reimbursements and those reimbursements are excluded from the employee’s taxable income — provided that the expenses are legitimate business expenses and the reimbursements comply with IRS rules. For changes in the deduction amounts businesses can take for meals, entertainment, and travel, read this blog post.

IRS compliance can be accomplished by using either an accountable plan or the per diem method.

Accountable Plan

An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. Commonly this is accomplished through the use of expense reports and submission of employee receipts for reimbursement. To qualify as “accountable,” your plan must meet the following criteria:

If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).

Saving receipts for all activities is just one piece of good documentation. However, this must be substantiated with what is known as the 5 Ws – who, what, when, where, and why. Along with each receipt, employees should document the the following on an expense report - (click here for a sample):

    1. The business relationship to the taxpayer or persons involved (Who)
    2. The type or category of the expense (What)
    3. The time and place of the expense (When, Where)
    4. The business purpose of the expense (Why)

Per Diem Method

In the case of out-of-town travel the employer can also use the per diem method. Instead of tracking each individual’s actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)

The IRS per diem tables list localities here and abroad. They reflect seasonal cost variations as well as the varying costs of the locales themselves — so London’s rates will be higher than Little Rock’s. An even simpler option is to apply the “high-low” per diem method within the continental United States to reimburse employees up to $282 a day for high-cost localities and $189 for other localities.

You must be extremely careful to pay employees no more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely fail to do so.

Preparing for 2018 Tax Returns

Employers should keep in mind that employees will no longer be able to deduct work-related expenses on their 2018 tax returns. To avoid surprises at the end of the year, it will be important to have a reimbursement policy in place and reimburse throughout the year. Whether you have questions about which reimbursement option is right for your business or the additional rules and limits that apply to each, contact us. We’d be happy to help.

18 Comments

  1. Laurie M.

    Can you be specific about what an “accountable plan” is in regards to “expenses under an accountable plan”?

    • Kruggel Lawton CPAs

      Accountable plans may include reimbursement for a number of different employee-related expenses, including:

      Employee travel expenses, including meals
      Purchase of tools and equipment
      Employee home office expenses
      Mileage costs
      Required uniforms not suitable for ordinary wear
      Dues and subscriptions
      Job search expenses for employees who have been laid off

  2. Laura

    So I have now gone to file my taxes and just found out that I can no longer claim my mileage for my outside door to door sales job. Will my employer be able to reimburse me for this mileage that is required in order to do my job in arrears? I feel like they should have notified me of this change instead of letting me find out this way. I drive around 28-30k miles each year and always received a good refund because of this, which is now gone….

    • Kruggel Lawton CPAs

      The Tax Cuts and Jobs Act did not mandate that employers communicate changes with their employees or explain how employees would be personally affected. It would definitely be worth a conversation with your employer to see if they will be reimbursing for 2018 mileage in arrears or plan to implement an accountable plan going forward. With an accountable plan, you would be able to submit an expense report for mileage reimbursements and get compensated for those charges throughout the year. Feel free to point them to this same blog post if they have questions.

      Sara Ross, CPA, CGMA
      Tax Manager

  3. Tony Silva

    In doing 2018 taxes, my employer has coded Box12 Code:L as $33,000.00 these are “employee expense reimbursements”.

    Tax software (TaxAct) is adding this amount to 1040 Line 1 as taxable wages, is this correct? should employee reimbursement for travel and lodging be a taxable event? Is the employer getting a tax deduction and not the employee?

    In the past, I was able to offset the reimbursed amount (Code L) by doing form 2106 which in 2018 is non-existing?

    HELP!

    • Kruggel Lawton CPAs

      Hi Tony,
      In general, expenses under an accountable plan that are substantiated and allowed by the IRS are not taxable to the employee. Only the amount in excess of what is substantiated would be taxable to the employee. The taxable, unsubstantiated amount should already be included on the W-2 Box 1, 3, and 5. To answer your question, no, the employee expense reimbursements shown on line 12 code L are not taxable and should not be added to Box 1 wages. The employer is getting the tax deduction. In this case, since the software appears to be doing it incorrectly, we suggest not entering in the Box 12 Code L amount into the software.

      Sara Ross, CPA, CGMA
      Tax Manager

  4. Travis Gertner

    Should of Employers had notified its employees about the recent law changes in mileage deductions ? Our Employer did not notify us regarding the tax law changes, and now the car allowance is on my W2 without the ability to deduct my mileage.

    • Kruggel Lawton CPAs

      Hi Travis,
      The Tax Cuts and Jobs Act did not mandate that employers communicate changes with their employees or explain how employees would be personally affected. It would definitely be worth a conversation with them to see if they will be implementing an accountable plan going forward. With an accountable plan, you would be able to submit an expense report for mileage reimbursements and get compensated for those charges throughout the year. Feel free to point them to this same blog post if they have questions.

      Sara Ross, CPA, CGMA
      Tax Manager

  5. Dan George

    I have served as an interim (temporary) Pastor for a church that is 25 miles from my home for 8 months (April – Dec) in 2018. Since this is a temporary position and outside my metropolitan area I was told my mileage to and from the church could be reimbursed to me under an accountable plan. This was done using a monthly expense report. Are these mileage reimbursements taxable to me and should I expect a W-2 from the church?

    • Kruggel Lawton CPAs

      Hi Dan,
      Since the reimbursements were set up under an accountable plan, they are not taxable to you and you should not expect to receive a W-2 from the church.

      Sara Ross, CPA, CGMA
      Tax Manager

  6. Laura Lloyd

    In the past, any extra perdiem earnings (equaling more than listed per GSA allowance locality charts) I received I counted as income. In 2018, as an employee, do I count all the perdiem I was paid as income? If not then I believe I need to make amendments for many past years.

    • Kruggel Lawton CPAs

      Hi Laura,
      As long as this is an accountable plan, any per diem paid (up to the GSA allowance based on locality) to an employee would not be included in income.

      Sara Ross, CPA, CGMA
      Manager

  7. Mike

    If an employer pays actual costs for hotel rooms, but provides a meal per diem to employees, is the meal per diem fully deductible to the business or only 50% deductible? Assume that meal per diem is within the federal rate… Thanks!

  8. sheridan vernon

    Am I correct that if I am temporarily working in
    CA where the GSA rate for housing is 124 per day and meals 68
    my employer pays me 85 per day for lodging and 50 for meals
    none of this is taxable to me even if the employer is deducting 100% of the meals….as this is considered an accountable plan.

    • Kruggel Lawton CPAs

      You are correct. This is not taxable to you as an employee. This is an expense reimbursement. The employer claims the expenses and is subject to the applicable deductibility limitations. With regards to meals, the employer would be limited to a 50% deduction.

      Sara Ross, CPA, CGMA
      Tax Manager

  9. Teresa Shinkle

    If you have both an accountable plan and an IRS hi/low per diem plan, can employees be paid under either plan during the year or can you only pay for their travel under one plan during the tax year?

    • Kruggel Lawton CPAs

      Hi Teresa,
      Yes, you can use either method during the year however you can’t switch methods during a trip. You must use the same method for all days during a single business trip.

      Sara Ross, CPA, CGMA
      Tax Manager

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