The Tax Cuts and Jobs Act (TCJA) and Your Reimbursement
Looking forward to the holiday season fast approaching? In the next four months we’ll be celebrating Halloween, Thanksgiving, Christmas, New Years and Tax Season. You probably don’t have your candy, turkey, gifts, champagne and migraine medication yet. But there’s plenty of reason to prepare for at least one of these festive times. And yes, I’m talking about that magical time between January and April when we prepare our taxes for the IRS: Tax Season. Last year, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law, affecting businesses across the nation. While the law technically went into effect on 1/1/18, it will impact taxes filed for April 15, 2019.
How does the TCJA change old tax law?
Well, as we said in our previous blog on this topic, it doesn’t change a whole lot.
Effective January 1, 2018, an employee no longer has the ability to claim a business expense deduction for unreimbursed business expenses that exceed 2% of their adjusted gross income via Schedule A and Form 2106.
To put that into perspective, in 2016, over 5 million tax payers claimed mileage as unreimbursed business expenses. This amounted to $35 billion dollars in deductions. If you aren’t self-employed and you previously claimed your mileage as a business expense deduction on your taxes, unfortunately, you can’t do that anymore.
How does the TCJA directly impact you?
That depends on the reimbursement you’re currently receiving. Let’s look at an example:
Joe is a mobile worker who receives a $300 allowance every month as a reimbursement for the driving he does for his food and beverage company. While that $300 a month did not cover the 12,000 plus miles he drives a year, he always wrote-off the difference as a business expense on his taxes.
Unfortunately, Joe can no longer do this. Without the tax savings from his business expense deduction, the $300 is even less adequate as a reimbursement for all the travel he’s doing. While Joe drove 5,000 plus unreimbursed miles, he cannot take the $1,280 as a tax deduction.
With this new tax law change, Joe’s employer should consider adopting a new mileage reimbursement model that will reimburse him for every mile he drives. Now let’s look at another example:
Phillip is a mobile worker who doesn’t receive any reimbursement for the driving he does for his pharmaceutical company. As he successfully manages his schedule, he’s racking up 20,000 plus business miles a year. He can afford the expense, but it certainly helped to write-off the business expenses in the past. So 20,000 miles in 2017, multiplied by the IRS business mileage standard of $0.535 is $10,700. Remove the $1,600 for the 2% of Aggregate Gross Income (AGI) and it comes out to an itemized deduction of more than $9,100.
Again, Philip can no longer claim his mileage as a business expense deduction. Which means he’ll get no tax relief for the expense of driving his car from meeting to meeting. The company that previously told Philip to write off his business mileage should be looking into a new program. Businesses also need to be aware of state labor codes that may require a reasonable reimbursement for business-related expenses.
I use the Motus App to track my mileage and get reimbursed. Does the new tax law change anything for me?
That really depends on how your employer reimburses you. If your company’s business vehicle program reimburses you at or under the current IRS business mileage standard and they require mileage logs that meet IRS requirements like Motus provides, you’re in the clear. Whether it’s a cents-per-mile (CPM) vehicle program, a Fixed and Variable Rate (FAVR) program or any other accountable variation, you can look forward to mileage reimbursements without fear of taxation. There is one catch: you have to submit all of your mileage.
Let’s say you’re on a FAVR program and you fail to submit at or above the 5,000 business mile IRS guideline. You will be taxed and ultimately unable to receive the unreimbursed expenses on your taxes. Depending on your employer’s policy, you may still be able to be reimbursed for those business miles at a later date, but you won’t be able to claim the deduction on your taxes.
Maybe you’re more excited about good food and spending time with family than filing taxes. Maybe mid-April is when you like to start worrying about the whole tax thing. Whatever your situation, it’s helpful to know how policy change impacts you directly. And Motus users, don’t forget to submit mileage from previous months!