Travel Reimbursement Post-TCJA

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Reimbursement for travel expenses has many benefits for businesses including attraction and retention of employees. The Tax Cuts and Jobs Act (TCJA) has imposed changes to benefits that make travel expense reimbursements more important to employees than ever.

Employee benefits

Previously, unreimbursed work-related travel expenses were deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. However, under this policy, many employees were unqualified for the deduction because they either did not itemize their deductions or they did not have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income (AGI) floor that applied.

The TJCA has suspended the miscellaneous itemized deductions subject to the 2% AGI floor through 2025. Now, employees who itemize deductions and have enough expenses that they exceed the 2% floor will not receive tax benefits for business travel. This has increased the employee demand for business travel reimbursements.

Business benefits

A business can deduct qualifying reimbursements, and such reimbursements are excluded from an employee’s taxable income. Under the TCJA, the deduction does not include entertainment expenses, and the deduction is subject to a 50% limit for meals.

Travel expenses must be legitimate business expenses, and reimbursements must comply with IRS rules to be deductible and excludable. An accountable plan or the per diem method can be used to ensure compliance.

Accountable Plan Method

An accountable plan is a formal arrangement to advance, reimburse, or provide allowances for business expenses.

In order to qualify as “accountable” a plan must meet the following:

  • Reimbursed business expenses must be “ordinary and necessary”
  • Employees must substantiate expenses ideally monthly; Amounts, times, and places must be included
  • Employees must return any advances or allowances they cannot substantiate within a reasonable time. This is generally 120 days.

Plans that fail to meet these requirements will be considered nonaccountable by the IRS. This transforms all reimbursements into wages, which are taxable to the employee, and subject to income and employment taxes.

Per Diem Method

When using the per diem method, IRS tables are used to determine reimbursements for lodging, meals, and incidental expenses. You can also determine only meals and incidental expenses based on location. Keep in mind that if you do not use the per diem method, lodging receipts will be needed to substantiate those expenses.

Ensure that you are paying employees the correct amount as the IRS imposes heavy penalties on businesses when employees are paid over the per diem amounts.

Contact us

We can answer any questions you have about travel expense deductions post TCJA. We can also help you determine which, if any, reimbursement practices are right for you. Contact us at 818-334-8623 or click here, and we will contact you.

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