With the new tax code in place for 2018, now is probably a good time to dust off your car allowance or vehicle reimbursement policy. The tax reform or Tax Cuts and Jobs Act (TCJA) lowers individual income taxes for most people and lowers corporate taxes significantly. But for mobile employees—people who do their job using a personal vehicle—there’s at least one change that could prove costly to them and to their employers.
The TCJA in a nutshell
The tax reform is intended to simplify the tax code for both businesses and individuals. The new tax code delivers a massive, permanent tax cut to corporations, but the verdict is still out for individuals. Despite lowering the tax bracket rates for nearly everyone for the next seven year, the new law also eliminates or limits several popular deductions.
Most significantly for mobile employees, the TCJA suspends the unreimbursed business expense deduction. Mobile employees previously could deduct unreimbursed vehicle expenses using Schedule A and Form 2106 if the expenses exceeded 2% of their adjusted gross income (AGI). Now they can’t. This creates a problem not only for these employees but also for any organization that does not fully reimburse employees’ business vehicle expenses. Employers can no longer rely on employees using the tax deduction to offset any shortcomings in their vehicle reimbursement policies.
How mobile employees may react to the TCJA
If mobile employees’ costs are not being covered by the company, they will take measures to protect their income now that they cannot claim a tax deduction. These measures could take different shapes depending on the type of business vehicle policy the employer uses.
If they receive a company car allowance, employees may drive less to lower their costs. If they get a mileage reimbursement, employees may report more mileage or drive more to make sure their costs are covered. Both of these behaviors will cost the company over time.
Employees may even leave the company if their costs are not being covered—it’s simple business. This could create pressure to alter the compensation plan to incentivize employees to stay.
Worse, employees will now be more prone to file labor code grievances in states that have an expense indemnification clause. These states prohibit employers from passing on business expenses to employees.
How will the TCJA impact your business?
If you are paying a company car allowance, you will face potential productivity losses as employees look to cut their expenses. Or, if you are reimbursing mileage, you may see operating costs increase significantly as employees seek to boost their reimbursement amount.
On top of these outcomes, the costs of defending labor code violations and potential lawsuits could devastate your bottom line.
Ultimately, failure to fully reimburse mobile employees under the new tax code will impact your attrition rates—there are many other employers out there that do fully reimburse their employees. If you don’t join their ranks, the costs to recruit and train new talent will add up over time and impact your top-line growth.
What you can do:
Review and update your business vehicle policy in 2018. Create a fair policy that ensures employees’ costs are being covered. This doesn’t necessarily mean throwing more money at your business vehicle policy. It might mean removing the tax burden from your taxable car allowance policy. Or it might involve adding a smart mileage log to your car reimbursement policy to provide more visibility into your expense.
Now is the time to develop a professional reimbursement policy that fully reimburses employees’ expenses. The changes to the tax code will really hit next year when the 2018 taxes are filed, and it will pay to be proactive now.
mBurse can help you switch from a taxable car allowance to a non-taxable plan or switch from a traditional mileage log to a more accurate mileage tracker. We can even introduce you to an entirely different reimbursement model—fixed-and-variable-rate reimbursement, or FAVR, which is the most accurate reimbursement approach of all.