IRS Form 2106 (Employee Business Expenses) and Instructions (2018); IRS Publication 463 (Travel, Gift, and Car Expenses (for 2018 Tax Returns))
The IRS has released the 2018 versions of Form 2106, used to determine and claim employee business expense deductions, and Publication 463, which explains the deductions available to employees and sole proprietors for business-related travel, non-entertainment-related meals, gifts, and transportation expenses. Both have been significantly revised to reflect changes made by the Tax Cuts and Jobs Act (see our Checkpoint article), including the eight-year suspension of miscellaneous itemized deductions for most employees and the general disallowance of deductions for entertainment and entertainment-related meal expenses. Here are highlights:
Form 2106 and Instructions. For 2018, this form can be used only by Armed Forces reservists, qualified performing artists, fee-basis state or local government officials, and employees with disabilities who have impairment-related work expenses. The revised form indicates its narrowed availability, removes references to entertainment expenses, deletes an obsolete provision regarding higher meal deductions for transportation workers, updates the standard mileage rate (see our Checkpoint article), instructs filers to report excess reimbursements on line 1 of their Form 1040 (rather than line 7), and conforms to relevant changes in Form 1040 and its schedules. The updated instructions explain these changes and discuss other developments affecting employee business expense deductions that did not alter the form, including depreciation deduction changes and higher inclusion amount thresholds for deducting vehicle-lease payments on passenger automobiles leased and put into service in 2018 (see our Checkpoint article).
Publication 463. The 2018 version reflects that entertainment expenses generally are no longer deductible, but that business meals remain generally deductible (subject to a 50% limitation). The publication directs readers to Notice 2018-76 for more information about food and beverages provided during or at an entertainment event, which may still be deductible as meal expenses if they were purchased separately from the entertainment or their cost is stated separately on any bills, invoices, or receipts. The publication explains that an employee’s unreimbursed car expenses can no longer be claimed as a miscellaneous itemized deduction except by certain individuals—including Armed Forces reservists, qualified performing artists, and fee-basis state or local government officials—who can take the deduction when determining their adjusted gross income. The publication also updates the standard business mileage rate, the per diem rates for establishing certain travel expenses (see our Checkpoint article), and various cost-of-living adjusted amounts related to the business use of cars, trucks, and vans.
EBIA Comment: The suspension of miscellaneous itemized deductions has no direct effect on an employer’s ability to pay or reimburse employee business expenses using the working condition fringe benefit rules or the accountable plan rules. Nor does it affect an employer’s ability to take a deduction for its expenses, because the limit on miscellaneous itemized deductions applies to individuals, not employers. Where the suspension takes its toll is on employees who have incurred unreimbursable business expenses that are no longer deductible. The changes to Form 2106 implementing the suspension are clear, but Publication 463 may inadvertently cause some confusion. While it acknowledges employees’ inability to take deductions for car expenses, and repeatedly notes that Form 2106 may only be used by the limited group described above, the chapters on travel expenses and meals do not include a warning that deductions for those expenses are now unavailable to most employees because of the suspension. Employees consulting the publication thus may wonder why they cannot use Form 2106 when those chapters suggest deductions are available. Clarification of the application of the suspension to travel expenses and meals would be welcome in the next version of Publication 463. For more information, see EBIA’s Fringe Benefits manual at Sections II.E (“Employee Business Expense Reimbursements”), IV (“Company Cars and Related Benefits”), and XXI (“Travel Expense Reimbursements”).
Contributing Editors: EBIA Staff.