The Tax Cuts & Jobs Act (TCJA) made significant changes that will affect millions of employees. Most of these changes went into effect on January 1, 2018 and will expire after 2025. Still, many employees and their employers may not yet be aware of some of the changes that will impact them.
Employee deduction loss
One of these changes is that employees who itemize deductions no longer may claim a deduction for unreimbursed business expenses that exceed 2% of their adjusted gross income. Unreimbursed employee business expenses fall into two categories: job-specific expenses and travel-related expenses:
- Job-specific expenses include things like safety equipment, small tools and supplies, union dues and dues to professional societies, educational classes specifically related to the current job, job search expenses, uniforms not suitable for ordinary wear and personal protective equipment.
- Travel-related expenses include things like meals and lodging when away from home and, of course, the travel expenses themselves. This encompasses all costs of getting to and from the employee’s business destination, no matter the method – air, rail, bus and even business mileage accumulated using an employee-owned vehicle.
Over 5 million employees affected
Looking at the list of “unreimbursed business expenses,” losing the ability to deduct business miles driven in an employee-owned vehicle may not seem like a significant change. However, many employees will be impacted. In 2016, more than 5 million employees claimed mileage as an unreimbursed business expense. This amounted to $35 billion in deductions, or an average of $6,965 per employee. In other words, this deduction was a meaningful way for employees to get closer to fair and accurate reimbursement for business use of their vehicles in situations where their employer vehicle programs fell short.
For example, imagine a mobile worker in a sales profession. As she successfully manages her schedule, she’s racking up 20,000 business miles a year using her personal vehicle. For that, her employer pays her a $500 monthly vehicle allowance. While $6,000 per year helped cover the costs of driving that vehicle, the employee also had the option to claim a $3,100 unreimbursed business expense deduction on her 2017 taxes assuming an $80,000 adjusted gross income.
Now, the tax reform law Congress approved in 2017 eliminates that deduction, which could be a shock to employees expecting to claim it. Additionally, employers could risk being out of compliance with expense reimbursement laws like California Labor Code Section 2802 and the recently passed Illinois Wage Payment and Collection Act, which are designed to pay workers what they are rightfully owed when it comes to expense reimbursements – including receipt-less expenses like business mileage and fuel expenditures.
Employers should warn employees
Given the inevitable impact that TCJA will have on employee compensation – and the possibility that employees may be asking questions about their tighter wallets come April – any employer who historically instructed its employees to write off their business mileage as a business expense deduction needs to be aware of the tax change, and of state labor law reimbursement requirements aimed at ensuring employees are paid what they are reasonably owed. This will help the company maintain legal compliance, while also ensuring that employees are reimbursed fairly – as many people won’t even realize the impact of TCJA until their 2018 taxes are filed. The good news is that there are steps employers can take now to offset the impact on employees and their own company.
What employers can do now
Any company that uses vehicle allowance programs to reimburse its mobile workforce should investigate alternatives. Reimbursement programs can deliver fair and accurate reimbursements to employees and, as an added benefit, can reduce tax waste for both employees and employers. Employers have options for programs that are the best fit for their mobile workforce. Those options include IRS compliant and tax-free programs. Two popular business mileage reimbursement program types are cents-per-mile reimbursement and Fixed and Variable Rate (FAVR) reimbursement.
At a high level, companies that use a cents-per-mile program would reimburse their mobile workers using the IRS business mileage standard rate, which changes annually, or sometimes twice a year. The most recently announced rate by the IRS is 58 cents a mile. This rate is calculated each year based on the average costs of owning and operating a vehicle in the year prior. A cents-per-mile program works the best for low mileage mobile workers, or those who drive 5,000 miles or less.
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For those driving more than 5,000 business miles, a FAVR reimbursement program is a more accurate program, as it reimburses employees for ALL costs associated with driving, beyond fuel. This includes maintenance, tires, oil, insurance premiums and taxes, which take into account geographic variances based on the individual employee’s location. Just by taking a look at yearly vehicle property taxes, it’s clear to see that they are not the same in every state. In Rhode Island, for example, vehicle property taxes in 2018 were $1,144 on car valued at $24,000, while they cost taxpayers just $24 in Louisiana.
By evaluating the different reimbursement options available now, employers can offset the impact of the recent tax law changes and avoid unpleasant April surprises for their employees.