Do you reimburse your employees for business travel expenses? If you don’t, you may want to consider implementing a reimbursement plan, because changes under the Tax Cuts and Jobs Act (TCJA) make these reimbursements even more attractive to employees. Many businesses who do reimburse for business travel expenses find that it helps attract and retain good employees, plus travel reimbursements also come with tax benefits if you follow an IRS accepted method.
The TCJA’s Impact
Before the TCJA, unreimbursed business travel expenses generally were deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. This allowed many employees with substantial unreimbursed expenses to recoup some of this cost on their personal income tax returns.
For 2018 through 2025, the TCJA suspends miscellaneous itemized deductions subject to the 2% of AGI floor. That means even employees who itemize deductions, and have enough expenses that they would exceed the 2% of adjusted gross income (AGI) floor, won’t be able to enjoy a tax deduction for business travel. Therefore, business travel expense reimbursements are now more important to employees than ever before.
The Potential Tax Benefits
Your business can deduct qualifying reimbursements, and they’re excluded from the employee’s taxable income. The deduction is subject to a 50% limit for meals and, under the TCJA, entertainment expenses are no longer deductible.
To be deductible and excludable, travel expenses must be legitimate business expenses and the reimbursements must comply with IRS rules. You can use either an accountable plan or the per diem method to ensure compliance.
Reimbursing Actual Expenses
An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria:
- Payments must be for “ordinary and necessary” business expenses.
- Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
- Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.
The IRS will treat plans that fail to meet these conditions as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).
Keeping it Simple
With the per diem method, instead of tracking actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses, based on location. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.)
Be sure you don’t pay employees more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely overpay per diems.
What’s right for your business?
To learn more about business travel expense deductions and reimbursements post-TCJA, contact your local Blue & Co. advisor. We can help you determine whether you should reimburse such expenses and which reimbursement option is better for you.