With the new tax laws enacted as part of the Tax Cuts and Jobs Act, effective for 2018-2025, employees will no longer be able to deduct, as miscellaneous itemized deductions, un-reimbursed employee business expenses. In addition, if any employee receives an expense reimbursement, not paid under an Accountable Reimbursement Plan (ARP), or receives an expense allowance, these amounts are considered taxable wages with no offsetting deduction.
These effects to the employee can be eliminated by the employer establishing an ARP. Such a plan basically requires that the employee must provide substantiation to the employer that all advances or allowances were used to pay qualifying business expenses and must return any payments in excess of the qualified expenses.
If an employer has an ARP in place, expense reimbursements and allowances to employees, who properly comply with the terms of the plan, are deductible by the company (subject to the 50% limit for business meals) and nontaxable to the employees. If a company does not maintain an ARP or an employee fails to comply with the companies ARP, expense reimbursements and allowances are still deductible by the company. However, they are taxable to the employee as compensation. Thus, such amounts are included on the employee’s Form W-2 and subject to income tax withholding. In addition, both the employer and employee are subject to employment taxes on such payments.
Because the tax ramifications of a non-ARP are so unfavorable for employees and are potentially unfavorable for the employer, companies generally should use an ARP for employee expense reimbursements.
Consult your tax advisor for further definition and advice.