Tax Reform Impacts Employee Business Expenses
Miscellaneous Itemized Deductions Subject to the 2% AGI Floor
Not all provisions of the Tax Cuts and Jobs Act benefit taxpayers, so if you own a business, pay attention. The suspension of the deduction for employee business cost stinks for employees. Under prior law, taxpayers who were employees were able to deduct expenses that relate to their employment as a miscellaneous itemized deduction. They deducted this to the extent the expenses exceeded 2% of their adjusted gross income. Yet, under the tax reform, employee business expenses do not allow for tax years 2018 through 2025.
Employee Business Expenses
However, this new limitation does not apply to self-employed individuals. For the taxpayers who work for themselves, the following continue to be tax-deductible on their business schedules. These are expenses such as business use of their personal vehicle, business-related travel, work-related education, and use of a qualified home office for business. Furthermore, tax reform actually provides them with more liberal expensing options and, for some, even a special deduction of 20% of qualified business income.
Accountable Reimbursement Plan
In addition, this limitation does not affect employees whose employers reimburse employee business expenses under an Accountable Plan. This applies to a Business-Expense Reimbursement Plan too. Under this Plan the employer can reimburse employees tax-free for business expenses. On the other hand, some employers can reimburse expenses without having an Accountable Plan. In this case employees’ W-2 wages include the reimbursement; since the expenses are not deductible under the new law, the reimbursement will be taxable.
Tax Reform Impacts Specific Occupations
The loss of employee business expenses as a deduction will impact certain types of employment more than others. Now, this is assuming the increased standard deduction does not make up for the loss of the deduction. With this said, some examples of some big losers include:
Professionals such as employed physicians, professional engineers, CPAs, enrolled agents, and other professionals with substantial annual continuing education expenses.
Long-Haul Truckers who have to pay for their own meal and lodging expenses while on the road.
Firefighters – Many are required to pay firehouse dues, which has been deductible expenses, as well as uniform expenses.
Outside Sales Employees – Many who work in the sales force work remotely from the employer’s business location. And, they usually incur travel and home office expenses.
Entertainers – These include actors, musicians, and the like. And, they have substantial costs for costumes, agent fees, and other employee business expenses.
Union Members, including those with sizeable union dues.
Educators, including teachers and other educators who work in elementary and secondary schools who have unreimbursed expenses for classroom supplies. Regardless of the $250 above-the-line deduction for teachers, that amount doesn’t begin to cover most teachers’ expenses.
Tradespeople who are required to provide their own tools of the trade.
What’s the remedy to avoid losing this employee business expense deduction?
The only possible remedy for the loss of this deduction is for an employee to negotiate an Accountable Plan with the employer. To be an accountable plan, the following three conditions must be met:
- The expenses covered under the plan must be business related;
- Requires Employees must under the plan to prove the qualifying expenses; and
- If employees receive advances, the plan must require them to return any amounts in excess of their proven expenses. Therefore, failing to return the excess advance amount will cause that amount to be taxable to the employee.
Do you have questions about tax reform’s impact on employee business expenses?
For questions that relate to the loss of this deduction or about how the change will impact a specific tax situation, give me a call. I’m Alex Franch, BS EA of WorthTax and you can reach our office at 781.849.7200 or email us at firstname.lastname@example.org. Better yet, as a new business or an entreprenuer who wants to start a business, make an appointment to come to our new Norwell, Massachusetts office or our other locations and develop a business tax strategy?
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