Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro
Since the Tax Cuts and Jobs Act (TCJA) went into effect in 2018, employees can no longer deduct unreimbursed work expenses as miscellaneous itemized deductions on their federal income tax return. Currently, there are four professions that are eligible for deducting their unreimbursed employee expenses on their federal return. They include the following:
While there are a handful of states that still allow the deduction for all taxpayers, the loss of this deduction has been a major tax blow to taxpayers with these expenses.
Never fear, there may be another way!
Employers have the right to provide reimbursement plans for their employees. There are two kinds of reimbursement plans available – accountable and nonaccountable plans.
Accountable Plans
Under an accountable plan, employees document expenses and either return money that is not used for work expenses, or they’re only paid a reimbursement for the expenses that they document to their employer. Payments under an accountable plan are not treated as wage income to the employee, and it doesn’t cost the employer any payroll taxes.
The IRS has established a 3-part test to determine whether an employee expense reimbursement plan is considered an accountable plan.
- All employee expenses that are reimbursed must have a business connection to the work for the company. Another way to look at it is that the employee’s expense must be an expense that would be deductible on the employer’s tax return.
- The employee must provide adequate substantiation of their expenses within a reasonable timeframe. The adequate documentation requirement depends on the kind of business expense. For example, office supplies may be adequately documented with receipts, but mileage and business meals may also require a log with explanations of the business purpose for the expense. Reasonable time is not clearly defined (the IRS says that individual facts and circumstances may determine what timeframe is reasonable) but there is a time safe harbor of within 60 days.
- The employee would need to repay excess reimbursement. In most cases this only happens when an employee is reimbursed in advance for bigger expenses like travel or equipment purchases.
Nonaccountable Plans
If your reimbursement plan is not an accountable plan (there is at least one of the three requirements not met), then it is a nonaccountable plan. These plans do not have the tax advantage of providing tax free reimbursement for the employee and the employer since these reimbursements are considered wage income. An example would be your employer gives you $500 for an upcoming business trip they’re sending you on, and you only end up spending $375 for food and lodging. You don’t need to return the unused portion ($125), and your employer will add all $500 of taxable income on your W-2.
Reporting expenses
If your employer has an accountable plan, they will likely provide you with their own expense reports. If business mileage is one of your common reimbursable expenses, you may want to consider downloading a mileage tracking app to your smartphone or other mobile device.
