Newsletter from
Steve Richardson & Company, Certified Public Accountants
December 27, 2017
Unreimbursed Business Expenses
Dear Clients & Friends of the Firm:
Promised Tax Planning Memos
As promised, here is the first of a few tax planning memos that relate to the new tax law. This memo deals with unreimbursed employee business expenses.
Unreimbursed employee business expenses
It is typical for people who work in several trades and businesses to incur substantial unreimbursed employee business expenses. Some of these trades and businesses are:
- Ministers & Clergy
- Outside Sales People
- Construction Workers
There are, of course, many other employees who also incur unreimbursed employee business expenses.
A Cry for Help!
Following is an email I got from a fellow accountant asking me for advice; it is reproduced below verbatim:
Steve,
I have a client who gets paid with a W-2 of $600,000, but has $150,000 in misc. itemized deductions. In light of the tax change below, any suggestions?
“Miscellaneous Itemized Deductions Suspended Under pre-Act law, taxpayers were allowed to deduct certain miscellaneous itemized deductions to the extent they exceeded, in the aggregate, 2% of the taxpayer’s adjusted gross income. New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended. (Code Sec. 67(g), as added by Act Sec. 11045)”
My friend and fellow accountant has an excellent question. His client is an outside salesman; obviously well compensated. But, the unreimbursed expenses are high! $150,000!
Under this new law, these expenses are not tax deductible.
Tax Planning: an “Accountable Expense Plan.”
There is only one solution; the employer needs to create an “Accountable Expense Plan.”
An “Accountable Expense Plan” is a plan that allows an employee to account for his expenses (typically in an expense report), turn those expenses into his employer and be reimbursed. These reimbursements, if done correctly, are not taxable.
The “Accountable Expense Plans” are excellent; they have been around for many years and the work well. The problems, all of which can be overcome with good planning, are:
- How can the business afford to pay these expenses?
- How can the business and employees organize and account for these expenses correctly so that they qualify as a part of an accountable plan?
How can the business afford to pay these expenses?
Obviously, it will be difficult for a business to financially absorb the cost of substantial unreimbursed employee business expenses. The solution is simple: reconsider the entire compensation scheme for the business.
Guidelines for how to reconsider compensation:
- Be fair; try not to use this as an opportunity to cut compensation costs. In the long-run this could undermine your business.
- Calculate the average employee costs of unreimbursed employee business expenses. This can be done in two ways:
- On an employee by employee basis
- On an employee class basis
- Reduce compensation by employee or by employee class
- Create an accountable reimbursement plan (We can help!).
- The plans must be in writing
- The plans can be employee by employee or by employee classification
- The plans can have dollar limits, once again, the dollar limits can be applied on an employee basis or on an employee class basis.
- Organize the paper work
- Create an expense report (We can help!).
- Create an internal accounting system to track the reimbursements.
This is a good law (at least I can make the best out of a not-so-good situation)
I (sort of) like this new law. We have many clients (literally hundreds) that have employees with substantial unreimbursed employee expenses. As you might expect, we have a significant number of these employee-clients (who incur substantial unreimbursed employee expenses).
There is often a “disconnect” between the employers (who feel that the compensation that they pay is excellent) and the employees (who feel that their compensation is being sapped by the unrelenting pressure of unreimbursed employee expenses). This is a cause for employee discontent and can lead to high employee turnover.
With this new law, the old problem of unreimbursed employee expenses will be brought into sharp focus.
The new business standard
This new law will, I believe, cause many more employers to adopt accountable reimbursement plans. If the employers do so correctly, it will not increase their financial costs. What it will do is this: the employee job satisfaction will improve and, with a bit of good planning, so will employee productivity.
Also, the new law will force all parties to take a fresh look at the true economic costs of doing business.
The Business and the Non-Profit Worlds
The problem of unreimbursed employee business expenses in the business world is obvious. The problem in the non-profit and church world is much-much worse for a variety of reasons.
Often non-profit organizations are strapped for cash, lacking in quality internal bookkeeping, and stuck in an early 20th century mindset that their employees are somehow obligated to be poor.
We can help employees and employers in the church and non-profit world overcome these barriers and establish functional accountable reimbursement plans.
Lemons for lemonade
There is a saying in tax practice: if the tax law gives you lemons, make lemonade. (Ok; I just made that up, but it’s a good principle.) The new tax law takes something away from employees engaged in outside business activities. Outside salespeople and people employed by nonprofit agencies may be seriously disadvantaged by this new law.
I will say it again: I think this could be a good law!
If so, how?
From a pure accounting point of view, this will allow businesses to more closely follow the basic economic principal of matching economic income with true economic costs. Unreimbursed employee business expenses are actually expenses incurred in creating income for the business. This is an important concept that has good real world business application. Done well, I think this concept will help businesses compete successfully with Amazon and other online retailers.
Economic trends in the USA
We are facing serious economic dislocations in the USA and in the world. The retail sector is dying fast; Amazon and other online retailers are killing local retail. Retail is not the only business sector being hard-hit.
I have a client that sells high quality baseball equipment; their major supplier is Mizuno (an important name in baseball). After 30-plus years in business, Mizuno has decided to complete with their own retailer by selling the same products online. Worse, the online price is actually higher than the wholesale price that the local retailer can purchase the same products. Unfair competition! Unfair; yes; but an all too common situation in modern retail.
It’s not just retail that faces this distorted economic playing field.
Industrial products and supplies are increasingly available from high quality online suppliers. Building supplies too!
There are success stories!
There is, in my opinion, only one way to beat the online retailers: added value through increased customer services.
My clients have many success stories dealing with on-line competition. One client added an outside sales force that focuses on providing a level of service impossible for online vendors. A personal visit with a hand shake and a sit-down discussion of the customers’ needs translated into significant growth in retail sales often at a price premium compared to online competition.
If you are selling athletic equipment, industrial supplies, building supplies or in any other line of business facing the onslaught of online competition, you can win! Look at your sales model and consider the value of an outside sales force. Any outside sales force, in my opinion, needs an accountable reimbursement plan.
Accountable reimbursement plans
Our CPA firm has helped hundreds of small businesses successfully install accountable reimbursement plans over the years. If you need help, call me.
Thanks! I love my job and, without you, I would not be able to do what I do. Thank You!
Steve Richardson, CPA