No longer will employees be able to deduct unreimbursed expenses like they could prior to the Tax Cuts and Jobs Act of 2017. The new law suspends the deduction for seven years, until 2025. Under these circumstances it might be in the interests of both employers and employees to address restructuring employment agreements.
The Federal Tax Reform made what are typically once-in-a-generation changes to the tax code, among them the rules that apply to deductions. For example, in 2018 the law increases the standard deductions to $12,000 for individuals, $18,000 for heads of households, and $24,000 for married couples filing jointly.
One trade off is unreimbursed business expenses are not deductible even if necessary for the business. Examples of such expenses often included in the deduction for unreimbursed expenses include:
- Uniforms required for the job but inappropriate for general use
- Tools or other equipment needed for work but not supplied by the employer
- Professional society dues
- Entertainment expenses
The reality is that most taxpayers didn’t use these deductions, first because they affected only those with unreimbursed expenses and second, because the deduction was allowed only for expenses above 2% of adjusted gross income. When applicable, these deductions were made on Schedule A.
This change applies only to employees: business owners who file deductible expenses on Schedule C are unaffected, partners in partnerships may still be able to deduct because each situation varies with business activity, see a qualified, experienced tax professional to determine if, or how, to use these schedules to your tax advantage).
For employees, the only option, with respect to unreimbursed expenses, is to seek reimbursement. Employers might understandably balk at higher employee costs, however, business expenses reimbursed under a qualified plan are deductible for the company and not taxable to the employee. Employers who want to keep effective employees may want to get a jump on offering reimbursement for previously unreimbursed expenses – or at least the amount employees were previously able to deduct. Otherwise employers could see in-demand employees moving to companies willing to reimburse these expenses if all other employment conditions are equal, or close to it.
An accountable plan must satisfy the following conditions:
- the expenses covered under the plan must have a business connection;
- the plan must require employees to substantiate the covered expenses; and
- the plan must require employees who receive advances to return any amounts in excess of their substantiated expenses.
Employees seeking an employment renegotiation may have to decide if it’s worth potentially disrupting their relationship with employers. Such approaches must be made thoughtfully and strategically. Requests are better than demands, understanding that there’s no guarantee reimbursement will be forthcoming.
The bottom line: This is a year of change. Act now to avoid higher taxes later.