The Tax Cuts and Jobs Act made changes that may be favorable to your business but at the same time made one big unfavorable change for employees. The Act suspended for 2018 through 2025 the miscellaneous itemized deduction for unreimbursed employee business expenses. This deduction had allowed employees who itemized their deductions to write-off their work-related costs as a deduction to the extent they exceeded 2% of adjusted gross income (AGI). Examples of employee business expenses that fell within the 2%-of-AGI rule (and could have been deductible on employees’ 2017 returns) include:
- Car or truck expenses
- Education expenses
- Home office deduction (if the office is used for the convenience of the employer)
- Tools and equipment
- Work clothes and uniforms
- Union dues
So for 2018 through 2025, employees who pay for these business expenses out of their own pockets get no tax deduction. This limitation applies not only to rank-and-file employees but also to owners of C or S corporations who personally pay for corporate expenses because they are employees of their businesses.
But companies can help out employees by covering costs under an accountable plan. In an ever-tightening job market, this feature can be an important tool for recruiting and retaining employees.
Until now accountable plans have been used primarily for travel and entertainment costs. However, their use isn’t restricted to these costs. You may want to have your plan cover an employee’s home office expenses (e.g., Internet access), tools and equipment, uniforms (beyond what the law requires an employer to pay for), and the costs of driving their personal vehicles on company business.