With conference calls and Web meetings increasingly prevalent, business travel isn’t what it used to be. If your company is still sending employees out on the road or employees incur business expenses on behalf of the company, it is essential to understand the tax ramifications, especially due to recent tax law changes.
Generally, for federal tax purposes, a company may deduct all ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business. This includes travel expenses that aren’t deemed lavish or extravagant.
For employees, business expenses are typically considered a “working condition fringe benefit” and, therefore, not included in gross income. Working condition fringe benefits are any property or service provided to an employee to the extent that, if he or she paid for the property or service, it would be tax-deductible.
Under the Internal Revenue Code, an advance or reimbursement for business expenses made to an employee under an “accountable plan” is deductible by the employer and not subject to FICA and income tax withholding. In general, an advance or reimbursement is treated as made under an accountable plan if the employer’s reimbursement of allowance agreement includes all of the following three rules:
- Expenses are paid or incurred while performing services for his or her employer,
- Accounts for the expense to his employer within a reasonable period of time and in an adequate manner, and
- Returns any excess reimbursement or allowance within a reasonable period of time.
An advance or reimbursement made under a “nonaccountable plan” isn’t considered a working condition fringe benefit — it’s treated as compensation. Thus, the amount is fully taxable to the employee, and subject to FICA and income tax withholding by the employer.
Under pre-tax law changes, if an employer didn’t have an accountable plan, the unreimbursed business expenses were included in the employee’s W-2 employee as taxable wages, but the employee could report these as a miscellaneous itemized deduction. Under the new tax law, most miscellaneous itemized deductions, including unreimbursed business expenses, are no longer allowed for tax years 2018 through 2025.
The employee bears the tax burden of the new tax law changes since these unreimbursed business expenses are no longer deductible on their individual tax return.
Although business transportation — going from one place to another without an overnight stay — is deductible, attaining “business travel status” fully opens the door to substantial tax benefits. Under business travel status, the entire cost of lodging and incidental expenses, and 50% of meal expenses is generally deductible by the employer that pays the bill. What’s more, those amounts don’t equate to any taxable income for employees who, as mentioned, are reimbursed under an accountable plan.
So how does a business trip qualify for business travel status? It must involve overnight travel; an employee traveling away from his or her tax home; and a temporary trip undertaken solely, or primarily, for ordinary and necessary business reasons.
Bear in mind that “overnight” travel doesn’t necessarily mean an employee must be away from dusk till dawn. Any trip that’s long enough to require sleep or rest to enable the taxpayer to continue working is considered “overnight.”
Furthermore, there’s an exception under which local, “nonlavish” lodging expenses incurred while not away from home overnight on business may be deductible if all facts and circumstances so indicate. One factor specified in the regulations is whether the employee incurs the expense because of a bona fide employment condition or requirement.
Even if your company has pumped the brakes on business trips, knowing the tax rules can save you valuable dollars on those “must go” travel engagements and other business expenses employees incur. We can help you with the crucial details — and particularly in setting up an accountable plan if you don’t already have one. For more information on business tax and travel expenses contact your MarksNelson tax professional at 816-743-7700.