The new tax law (Tax Cuts and Jobs Act)-Unreimbursed employee expenses
What does the new tax law mean for unreimbursed employee business expenses?
Starting in 2018 employees will no longer be able to take the miscellaneous itemized deduction for unreimbursed employee business expenses. Before this law, unreimbursed employee business expenses were deductible on the Schedule A. This is one of the more unpopular changes in the new tax law that will affect a lot of employees that have a large number of unreimbursed work expenses. As with most changes, there are bad and good things that come from it. The most important thing is to be knowledgeable about it and have a plan!
For some who are W-2 employees that go to their workplace, work at one site and do not incur work-related expenses this may seem to be a minor change.
When it becomes a major change is when you are a W-2 employee and travel offsite for work, work from a home office, purchase uniforms or have other work-related expenses that are unreimbursed by your employer.
Some of these items include:
· Union dues.
· Home office.
· Travel expenses including lodging, airfare, car rental, and meals.
· Licenses and regulatory fees
· Educator expenses over the $250 deductible on the Form 1040
· Miles traveled for work.
· Tools and supplies.
· Membership dues.
There will be certain professions that will be hit hard such as trucking, mechanics, sales/marketing and others that traditionally pay a lot of expenses personally without employer reimbursement.
There is an upside to this change. The definition of unreimbursed employee expenses has been confusing to many. This caused taxpayers to either not use this deduction or use it improperly.
To further complicate matters you would be able to deduct unreimbursed employee expenses only if you were itemizing on your tax return. Even then you would only be able to deduct these expenses once your miscellaneous itemized deductions went over 2% of your adjusted gross income. For many taxpayers, this was not an option. They did not have enough itemized deductions to exceed the standard deduction which meant this deduction did not help them.
A big help to offset the loss of the deduction for many will be that the standard deduction is being nearly doubled what it was under the old law. Under the old law, the married filing joint standard deduction for 2018 would have been $13,000 whereas under the new law it is $24,000.
What should you do?
While we are still waiting on the IRS to issue regulations to offer further guidance, we are already exploring ways to form new compensation arrangements to help with the loss of this deduction.
One option is for the employee to be reimbursed directly by their employer plan to receive compensation for job-related expenses.
In some cases, it may be more beneficial for both the employer and employee to offer reimbursements instead of a raise. How can this be you may ask. Here is an example:
Suppose in 2018 Jordan worked from home and did so for the benefit of his employer. He has a home office that is a designated area for work. He does not have an office at his employer's location. Occasionally he is asked to travel to various customer locations and pay tolls on the route. He has various other items that he has been responsible for paying personally. Altogether, his unreimbursed business expenses total $3,500.
When Jordan and his employer had his annual review, he was offered a 5% raise. This raise would have been comparable to his unreimbursed business expenses. He and his employer made the wise decision that instead of a raise he would get reimbursed for his home office, mileage, and other expenses.
Why in many cases is this a wise decision? It is better for the employee because they would not pay tax on the reimbursement. It is better for the employer because they are also not having to pay tax on the reimbursement. It also does not count toward salary and will save in various other areas such as insurance and workman's comp.
If you want help determining what qualifies for reimbursements and if it will benefit your company to start offering reimbursements contact myself or another CPA and ask for a cost comparison. Also, there are other possible options to discuss. You and your employees may both benefit from some proper strategic tax planning!