Under recent tax legislation, the deduction for miscellaneous expenses has been eliminated, effective for 2018 through 2025. This wipes out any write-off for employee business expenses you pay out of your own pocket.
However, employers will often agree to authorize a plan that reimburses business expenses, like those involving travel. As a result, reimbursements you get from your employer may be tax-free to you, while the payments remain deductible by the company.
Your employer’s accountable plan
Your employer may authorize a plan that reimburses travel expenses by using an accountable plan, which helps ensure that expenses qualify for favorable tax treatment. The plan complies with tough IRS rules requiring substantiation for the date, time, place, amount and business purpose of business travel. Similarly, an accountable plan may be used to reimburse employees for the cost of tools, uniforms or other expenses.
In order for an accountable plan to qualify for tax breaks, it must meet the following requirements (and you can help):
- The expenses must have a business connection. The plan may reimburse your travel expenses to a distant location on behalf of the company, but not a disguised vacation. For instance, if you go on a business trip and spend most of the time lying on the beach drinking margaritas, your expenses likely won’t be considered related to business. It may be a good idea to confirm with your employer what type of expenses qualify before you go on a business trip.
- Employees must account for expenses to the employer within a reasonable time. Usually, you’ll file the paperwork with the accounting department once you return from the trip. But this process can’t drag on for months. Ask your employer how much time you have to report your business expenses.
- Employees must return excess reimbursements within a reasonable time. For example, 90 days might be the max. You can avoid putting your tax breaks in jeopardy by asking your employer what the deadline is to return any excess when you first receive the reimbursements.
If the accountable plan doesn’t comply with these rules, payments won’t be deductible by your company. Even worse, you and other employees will be taxed on the reimbursements — even though you incurred the costs doing your job! Check with accounting to ensure the requirements are met.