The Tax Cuts and Jobs Act (TCJA) of 2017 brought about significant changes to the U.S. tax code, and, as a result, it had a notable impact on how employee business expenses are treated, especially concerning accountable plans. Accountable plans are reimbursement arrangements that employers use to repay employees for work-related expenses. This article explores how the TCJA has redefined the landscape for accountable plans, and it emphasizes the importance of these plans for both employers and employees navigating the current tax environment. The article further provides best practices for employers to align with TCJA provisions and optimize tax benefits, and finally delivers answers to frequently asked questions to clarify any doubts about how accountable plans work in light of the TCJA.
The TCJA significantly altered the tax rules for deducting employee business expenses. Prior to the TCJA, employees could deduct unreimbursed business expenses as miscellaneous itemized deductions on their personal income tax returns. However, the TCJA suspended these tax deductions for tax years 2018 through 2025, which eliminated the ability for employees to claim such expenses on their personal returns. This change made accountable plans more important. By using accountable plans, employers can reimburse employees for business expenses without increasing the employees’ taxable income.
What Are Accountable Plans?
An accountable plan is a reimbursement arrangement where employers repay employees for business-related expenses. To qualify as an accountable plan, it must meet these IRS requirements:
- Business Connection: The expenses must be directly related to the employer’s business activities and incurred while performing services as an employee. Personal expenses are not reimbursable.
- Substantiation: Employees must provide detailed records and receipts for the expenses within a reasonable timeframe. Employees must show they spent the money for legitimate business reasons.
- Third-party evidence, like receipts, will typically suffice. The employee should record the business purpose, reason for the expenditure, date, location, and parties involved.
- Exceptions to the documentation rule:
- Individual outlays less than $75 for expenses other than lodging do not require a receipt.
- If the employer reimburses for meals or lodging using IRS per diem amounts, no receipt is required.
- The IRS is more lenient in requiring a receipt for transportation expenses, such as taxi, subway, or bus.
- There is no receipt for mileage when driving a vehicle.
- Return of Excess Amounts: Any advances exceeding substantiated expenses must be returned to the employer promptly.
When these criteria are met, reimbursements under an accountable plan are not considered taxable income, and employers can deduct these expenses as business costs.
Impact of the TCJA on Accountable Plans
The TCJA’s suspension of miscellaneous itemized deductions from 2018-2025 increased the importance of accountable plans. Accountable plans allow employers to reimburse employees for business expenses without the reimbursements being considered taxable income for the employee. This is beneficial for both employers and employees:
- For Employers: Reimbursements are deductible as business expenses, which reduces the company’s taxable income. Reimbursements under an Accountable Plan are not subject to payroll taxes, so employers can save on their share of FICA (Social Security and Medicare) taxes.
- For Employees: Reimbursed amounts are not subject to income or payroll taxes, which preserves take-home pay and simplifies tax filings.
Key Considerations Post-TCJA
- Elimination of Entertainment Deductions: The TCJA permanently disallowed deductions for business entertainment expenses. Employers should not reimburse such expenses under accountable plans. If an employer reimburses an employee for entertainment expenses, the reimbursement must be included as wages to that employee.
- Increased Standard Deduction: With the standard deduction nearly doubled under the TCJA, fewer individuals itemize deductions. This makes accountable plans even more beneficial for maximizing tax advantages.
Best Practices for Employers
To align with TCJA provisions and optimize tax benefits:
- Review and Update Reimbursement Policies: Ensure that expense reimbursement policies qualify as accountable plans under IRS guidelines.
- Educate Employees: Provide training on proper documentation and timely submission of expense reports to maintain the integrity of the accountable plan.
- Consult Tax Professionals: Regularly seek advice from tax experts to stay informed of legislative changes and adjust policies accordingly.
- Your plan could include:
- What is and isn’t reimbursable under the plan
- Protocols for documenting expenses and substantiation
- How the plan applies to employees and non-employees (such as independent contractors)
- How soon to submit expenses after they are incurred or paid
- When employees can expect reimbursement after expense submissions are received
- How quickly to return unsubstantiated reimbursements to the company
FAQs
- Q: What expenses qualify for reimbursement under an accountable plan?
- Expenses must be business-related, substantiated with documentation, and any excess reimbursements must be returned to the employer.
- Q: How does the TCJA affect deductions for employee business expenses?
- The TCJA suspended deductions for unreimbursed employee business expenses through 2025, highlighting the importance of accountable plans for reimbursement.
- Q: Are entertainment expenses deductible under accountable plans post-TCJA?
- No, the TCJA disallowed deductions for business entertainment expenses, so they should not be reimbursed under accountable plans.
- Q: Do accountable plan reimbursements count as taxable income?
- No, reimbursements under a compliant accountable plan are not considered taxable income for employees.
- Q: Can an employer deduct reimbursements made under an accountable plan?
- Yes, employers can deduct reimbursements as business expenses, reducing their taxable income.
- Q: What happens if you don’t follow accountable plan rules?
- The IRS will treat your reimbursement plan as a “Non-Accountable Plan,” and any expense reimbursements you make to employees will be considered wages.