This article is another in City National’s ongoing explanations of the Tax Cuts and Jobs Act of 2017 (the “New Act”). The New Act significantly modifies the rules under the Internal Revenue Code (IRC) of 1986 as amended (the “Old Code”).
In this article, we explain the changes introduced that affect unreimbursed business employee expenses.
Under the Old Code
In the course of her or his business function, an employee may incur expenses on behalf of her or his employer that are not reimbursed by the employer. If and when this occurs, the employee may deduct that unreimbursed expense on IRS Form 2106-EZ and by attaching that form to her or his IRS Form 1040.
In order to deduct an unreimbursed expense, the expense must be an “ordinary and necessary” expense in relation to the employee’s job. The expense must be (1) common and accepted in the employee’s field or trade, business or profession, and (2) it must be a necessary expense that is helpful and appropriate for the business itself. An example of such an expense would be when an employee drives extensively for his or her job, but the employer does not reimburse the employee for those miles driven.
Unreimbursed employee business expenses are considered miscellaneous itemized deductions.
Under the Old Code, an employee was able to deduct unreimbursed business employee expenses only when her or his miscellaneous itemized deductions exceeded two percent of her or his adjusted gross income (AGI).
Under the New Act
The New Act repeals the deductibility of such miscellaneous itemized deductions, thereby disallowing any deductions for unreimbursed business employee expenses. This provision of the New Act will sunset on Dec. 31, 2025, and the Old Code provisions will return on Jan. 1, 2026, unless the provisions of the New Act are extended prior to sunset.
The New Act increases the standard deduction significantly. That increase appears intended to overcome the loss of the deductibility of miscellaneous itemized deductions. The changes may also encourage companies to start reimbursing employees for business employee expenses where before the company simply relied on the employee deducting them on her or his personal IRS Form 1040. Business owners may wish to consult with their tax advisors about their current reimbursement policies to ensure those policies are in line with the provisions under the New Act.
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