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TCJA Creates New Reasons for Accountable Plan Expense Reimbursements

Failure to use an accountable plan for your employee expense reimbursements (including yourself if you operate as a corporation) turns those improperly reimbursed expenses into taxable wages.

In other words, by failing to comply with the accountable plan rules, you turn the tax-free reimbursement into taxable W-2 wages. That’s about as dreadful as it can get (non-taxable into taxable from a simply and avoidable mistake).

And here’s something to think about: If you have employees who incur business expenses on behalf of your business and you don’t reimburse them, they are simply out that money. The Tax Cuts and Jobs Act (TCJA) denies them a deduction for those business expenses.

And if you reimburse business expenses to yourself as a corporate owner or to your employees incorrectly, you turn what you thought was a tax-deductible reimbursement of business expenses into W-2 taxable income. Think how ugly this is.

  1. You incur a proper business expense.
  2. Your corporation reimburses you, the shareholder-employee, for the expense but does so in violation of the rules.
  3. You now have W-2 income from the improper reimbursement.
  4. You have no personal tax deduction for the proper business expense.
  5. Your corporation pays extra payroll taxes because the proper business expense is now a W-2 wage.

With some straightforward safeguards such as an accountable plan, you don’t have to suffer from the TCJA, or worry about business expenses disappearing or creating unhappy employees such as yourself.

Without an accountable plan, business expense reimbursements can easily be improper and count as additional taxable wages.

  • For you and your employees, that results in an increase in both (a) personal income taxes and (b) FICA taxes on the reimbursements.
  • Your company pays the employer’s share of FICA taxes on the reimbursements.

With proper reimbursement under an accountable plan, the employee receives the expense reimbursement tax-free. The corporation deducts the business expenses.

 

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