Changes to business expense deductions
Employer’s Deduction for Fringe Benefit Expenses Limited
Under prior law, a taxpayer could deduct up to 50% of meals and entertainment; housing and meals provided for the convenience of the employer on the business premises were 100% excluded from gross income; and qualified transportation fringe benefits were not included in an employee’s gross income.
For amounts paid after Dec. 31, 2017, all deductions for entertainment expenses are disallowed, eliminating the subjective determination of whether such expenses are sufficiently business related. The current 50% limit on meals is expanded to meals at an in-house cafeteria or on the premises of the employer. Deductions for employee transportation (parking and mass transit) are denied, but they are still excluded from employee income.
For tax years beginning after 2025, there will be no deduction for meals provided for the convenience of the employer on the employer’s business premises or at most employer-operated facilities.
Accountable Plan for Employee Expenses
Unreimbursed expenses incurred in connection with employment were previously deductible as a miscellaneous itemized deduction. With the elimination of this deduction in the new tax law, an “accountable” reimbursement plan should be considered.
Under an accountable plan, the employer reimburses employees for employment related expenses or pays an expense allowance, but requires employees to “adequately account” for the expenses. This means employees must submit an expense record, receipts, and other documentation indicating the expense amount, time and place, and business purpose. If an allowance is provided to cover expenses, the plan must require employee to pay back any excess payments received but not spent on documented business expenses.
Under an accountable plan, the reimbursement or allowance is not included in employee W-2 income and the employer receives a deduction for these reasonable business expenses.