Using Accountable Plans to Replace Lost Miscellaneous Itemized Deductions

Did you used to itemize your deductions before 2018?  Do you miss being able to deduct unreimbursed work-related expenses like mileage, professional dues, and education from your income?  Did your tax bill increase as a result of no longer being able to deduct these expenses? If so, there may be a solution, if your employer is willing to go along with it.

Consider a taxpayer who is in the 30% tax bracket.  In 2017, she was able to deduct $12,000 in unreimbursed employment expenses for a total tax savings of $3,000.  She couldn’t claim these deductions at all in 2018.  If the taxpayer’s employer is on board, she can reduce her taxable compensation by the amount of the unreimbursed expenses by treating them as a working condition fringe benefit.

“A ‘working condition fringe benefit’ is any property or service provided to an employee to the extent that, if the employee paid for the property or service, the amount paid would be allowable as a trade or business expense.”[1]  Working condition fringe benefits would be excluded from the employee’s gross income for income tax purposes, not subject to employment taxes, and deductible by the employer.[2]

For a cash reimbursement of work-related expenses to qualify for a working condition fringe benefit, the arrangement must be structured as an “accountable plan,” which is a plan that follows certain IRS regulations.  To comply with these regulations the plan must require: (1) a business connection; (2) adequate substantiation; and (3) the return of excess advances.

To satisfy the business connection requirement, the amounts paid or incurred by the employee must be in connection with performing services for the employer.  The employer must make sure that the reimbursements or allowances are clearly identified as such, either in a separate check from the employee’s pay check or by delineating the reimbursement or allowance on the employee’s pay stub.

To satisfy the adequate substantiation requirement, the employee must be required to submit documentation, such as an expense report, diary, log or detailed receipt, within a reasonable time period, that shows the amount and business purpose of the expense, the time and place of any travel, the date and description of any business gifts, and the business relationship to the employer of each person receiving a gift.  For travel expenses, an accountable plan is permitted to use federal per diem rates for the basis of determining reimbursement amounts.

The plan must also require employees to return any advance that exceeds substantiated business expenses.  Any unreturned excess amount is treated as additional income subject to income taxes and federal employment taxes.  However, if the employer pays a per diem travel allowance that doesn’t exceed the federal per diem rate, employees can retain the excess of the per diem over actual expenses.  This will not disqualify the accountable plan or require the excess to be treated as taxable income.

If you are an employee who regularly incurs unreimbursed business expenses and you are hoping to minimize income taxes to the greatest extent possible, talk to your employer about whether they offer working condition fringe benefits.  If you are an employer looking to improve your cash flow and/or boost morale among your employees, consider establishing an accountable plan for this purpose.

[1] Gardner, Randy, J.D., LL.M, CPA, RLP®, CFP®, and Welch, Julie A., CPA, PFS, CFP®. “Use Accountable Plans to Retain Benefits of Lost Miscellaneous Itemized Deductions.” Journal of Financial Planning. July 2019: 30. Print.

[2] Gardner & Welch at 31.

Ask Kit Kat: ASPCA/NYPD Partnership

Hook Law Center: Kit Kat, what can you tell us about the ASPCA/NYPD partnership which is now in its 5^th year?

Kit Kat: Well, this is a huge success story, if there ever was one! ASPCA and the NYPD (New York Police Department) have been working together since 2013, actually. Back then, it was experimental and only involved one of NYC’s boroughs—the Bronx. When the cooperation proved to be a success, it became a city-wide effort in January 2014. This would mean a lot to abused animals since NYC with its 5 boroughs covers a lot of territory, millions of people, and 77 police precincts. That would mean a lot more attention would be given by people with the power to intervene when abuse/neglect was spotted.

ASPCA and NYPD worked hand-in-hand to make the lives of neglected animals better. Some of the things they did were: 1) establish a special center called the Animal Recovery Center (ARC) to care for the abused animals which were seized. 2) set-up a hotline on the NYPD Crime Stoppers Program to receive anonymous tips concerning animals abuse, and 3) passing laws which require the owners of abused animals with pending court cases to pay the cost of care for the animal while the case is being settled. This encourages a faster resolution of cases, and animals can be placed for adoption much more quickly than in the past.

Some of the cruelty where intervention occurred is unbelievable. One of the earliest cases involved a pit bull named Fraggle. He was found zipped inside a suitcase,  severely malnourished, and abandoned. After rehabilitation by the ASPCA, he was able to be adopted. Another of the  positive outcomes of the collaboration between the 2 departments is that people are also helped. NYPD Police Commissioner James P. O’Neill, says, “Animal cruelty is often linked to other serious crimes against people, including domestic violence. And so, by assisting animals in our neighborhoods, together we’re making our nation’s safest large city even safer.” (“A New Day for Animal Victims of Cruelty,” ASPCA Action, Issue 1, 2019, p.11-15)