Over the next several months we will publish changes in the tax laws that may affect insurance agencies or their employees. The newest tax law revision will be good for some businesses and individuals but will require some changes in the way we address some income and expense lines, personally and through our businesses.
For instance, until December 31, 2017 an employee was able to deduct out of pocket business expenses on Schedule A – “Itemized Deductions” on their personal tax return.
If your employer did not reimburse you for mileage used for business purposes (not to or from work) you could deduct this if you itemize expenses personally. If you need a laptop and your company does not buy it for you or supply you with one, you could deduct that cost on Schedule A as well. Business meals were deductible at 50% on your personal return if your employer did not reimburse you. Any continuing education not sponsored by the agency also qualified for itemization on your Schedule A.
This permitted some agencies to offer a regular stipend for business expenses to certain employees that incur such expenses. Those stipends were generally considered additional income to the employees to cover out-of-pocket business expenses and the employee subsequently deducted those amounts from their personal tax returns through the deductibility of unreimbursed business expenses on Schedule A.
As of January 1, 2018, these items are no longer available to be deducted on personal tax returns. The entire section on Schedule A that allowed for these expenses has been eliminated.
Here’s what can be done.
The best choice and one used historically in larger, professional businesses is the institution of a reimbursable plan for business expenses. This means that the employee will provide receipts and documentation for any business expenses and the employer will then reimburse him without it impacting payroll. These expenses would be deductible to the employer as business expense and have no taxable impact on the employee. As an aside, we consultants at Agency Consulting Group, Inc. have used a reimbursable plan for many years. We account for every mile of business use on personal cars and every dollar of normal business expenses both to justify any expenses to our clients and to satisfy the needs of the tax laws. You get used to it quickly and it becomes routine.
The more common way of reimbursing an employee in the past has been to give the employee a flat monetary allowance each month for sponsored business expense. If this was done, the only way an employee could eliminate this additional taxable income from their tax return was to itemize business expenses on Schedule A. Since that is no longer available, if agencies continue this practice it becomes additional taxable income to the employee for business expenses that they would not incur were it not for agency required activities.
In this change, the agency is not obligated for more than it was paying previously through a monthly allowance but the monies will no longer be considered taxable income to the employee subject to FICA, Medicare, State Income Tax (many states never permitted the employee to write off business expense), Local Taxes or State Unemployment, and Disability tax. There are also no employer matches on these funds, saving time and money for the agency as well.
The complication of accounting for receipts of itemization is the price you must pay to gain maximum advantage of the new tax law. The company will be able to deduct the expenses, no payroll taxes will be applicable to the reimbursements and the employee will not face additional taxable income. If you continue to pay monthly stipends for employee business expenses the employee will have to recognize those stipends as additional taxable income since no provisions remain for Schedule A deductibility.
Make sure you have a plan with your accountant regarding the treatment of reimbursable business expenses for your employees and for the agency. If you have any questions we have an Enrolled Agent (licensed to practice before the IRS) who can be retained to help you.