When your staff members need to travel for work, some practical considerations invariably arise. For instance, you need to consider traveling expenses for employees and all that those expenses entail, especially taxes and deductions.
The Tax Cuts and Jobs Act (TCJA) of 2017 allows businesses to continue to deduct 50% of business meal costs — as long as the taxpayer is present, and the food and beverages are not extravagant or exorbitantly expensive.
Such tax-allowable travel expenses for employees have traditionally helped businesses attract and retain the best talent suitable for the position. Have the TCJA changes tied businesses' hands to recoup certain travel costs?
Here’s what you should know.
A Closer Look at Employee Travel Expenses Deductibles
A few adjustments to tax laws via the TCJA directly influence your approach to tackling employee travel deductions. Here are some impacts you might experience as you venture into this territory.
The AGI Floor Issue
From 2018 through 2025, the TCJA has suspended miscellaneous itemized tax deductions over 2% of an employee's adjusted gross income (AGI) floor. The new floor means that employees who need to itemize any deductions — but do not have enough business expenses to exceed the 2% AGI floor — can't enjoy a tax deduction.
Many employees may not reach the floor to be able to deduct the expenses from their taxes, so employee coverage of travel expenses is even more important.
Deduction of Qualifying Reimbursements Only
Businesses can now deduct qualifying reimbursements — as noted earlier, those transactions conducted in the taxpayer's presence that are not considered too luxurious — subject to a 50% limit for meals. Further, the employee's taxable income cannot reflect the reimbursements. The IRS recommends creating an accountable plan or providing comprehensive travel and meals-per-diem policies to ensure compliance.
The Accountable Plan Strategy
An accountable plan is a formal arrangement for your organization to advance or provide budgetary allowances for an employee's business expenses while traveling.
Here are a few criteria to consider while developing your accountable plan:
- Employees must substantiate expenses with proof, such as receipts that show dates, times, business names and addresses. Employees should provide this documentation at least monthly.
- Employees should submit expense reports only for "ordinary and necessary" business expenses.
- If allowances are not substantiated, employees must return the funds within a reasonable time frame, typically 120 days.
However, note that the IRS will hold businesses to this plan, which could cause tax headaches for you and your employees.
Minute7 Can Help Track Expenses and Receipts With Ease
Our team at Minute7 wants to help you ease the tax pressure for your employees and business by tracking expenses and receipts via web-based expense tracking and receipt tracking software. Your employees can enter receipts instantly to ensure substantiation and reduce stress. We want to make it easier for you to deal with taxes and so much more, so reach out to us to enjoy a free trial of our expense and time-tracking solution.