The passage of federal 2018 tax reform legislation (aka the Tax Cuts and Jobs Act, or TCJA) left many with questions. For our customers in particular, the big one is: “What does this mean for my vehicle reimbursement plan?”
What hasn’t changed with the TCJA?
The good news is that the legislation has no impact on the fundamentals. Businesses using Fixed and Variable Rate Reimbursement and/or other accountable mileage reimbursement plans don’t need to make any changes. Note that it is vital for mobile workers to submit their mileage before the end of the year. If they fail to do so, they will not be able to claim them as an unreimbursed business expense on their taxes.
What has changed with the TCJA?
What has changed is primarily on the individual side – and the change there is quite substantial. The TCJA eliminates an employee’s ability to take a tax deduction for unreimbursed vehicle expenses. Effective January 1, 2018, employees can no longer claim a deduction for unreimbursed business expenses that exceed 2 percent of their adjusted gross income (Schedule A and Form 2106). In other words, if your company’s mobile employees have so far been filing for reimbursement independently and not relying on the company to reimburse their driving-related business expenses, they will find that’s no longer an option. The odds are that they’ll be looking elsewhere for the same compensation (i.e. to their employer).
Where does the 2018 Tax Reform put my business?
This isn’t necessarily a bad thing. Companies have always been subject to labor laws when it comes to reimbursing employees for their driving-related business expenses. Whether it’s state-to-state or county-to-county, these laws often put them on the hook. Failing to properly reimburse employees for their expenses puts businesses at risk both legally and financially. The TCJA may be a catalyst, prompting employees to seek reimbursement from their employers instead of filing for it on their own. Following best practices for mileage reimbursement improves companies’ overall risk posture and does right by employees. And that’s simply good business.
Again, the fundamentals of vehicle reimbursement have not changed:
- Fixed and Variable Rate (FAVR) reimbursement remains the fairest, most accurate and defensible method of reimbursing employees for the business use of their personal vehicle. It’s the most accurate of the IRS-approved mileage reimbursement methods. FAVR plans do require considerable data to substantiate expenses and claims in order to be IRS-compliant. However, our platform fully-automates the process, making it easy to employ. FAVR program expenses continue to be tax deductible for employers and non-taxable to their employees – it’s a win-win.
- Cents-per-mile programs also remain unchanged. Businesses that reimburse employees using a compliant, accountable cents-per-mile plan with rates equal to or less than the IRS Safe Harbor Rate can continue to make those payments to employees on a non-taxed basis.
- Flat allowance programs that don’t meet the requirements of an accountable plan, such as flat monthly allowances, continue to be taxable.
Of course, it’s important to note that the tax reform changes don’t apply to 2017 taxes filed this April. However, planning for 2018 taxes, which will be filed in April 2019, should already be well underway.
What should your company be doing?
Administrators should be aware of the impact this new law will have on their program. If you want to learn more, there are several avenues. We suggest directing your legal and tax counsel to IRS Revenue Procedure 2010-51. It explains the purpose and substantiation function of FAVR and Accountable Plans. The Revenue Procedure also cites Internal Revenue Code Section 1.62-2 and Section 62 on the deduction of ordinary and necessary costs of using a personal vehicle for business.
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