In the Payroll Mailbag: May ’18

Are employees’ business entertainment expenses taxable?

Question: If the company can’t write off employees’ business entertainment expenses on its corporate return, must we tax employees on them? Wouldn’t that be double dipping for the IRS?

Answer: No, it’s not double dipping. The IRS has commented that the law did not change the working condition fringe benefits rules. And that’s key, since employees’ business expense reimbursements fall under those rules. The working condition fringe benefit rules have existed side-by-side with the 50% deduction disallowance for employees’ business meal and entertainment expenses for quite some time. In other words, you could always reimburse employees 100% tax free for those expenses, but at the corporate level—on your 1120—those expenses were only 50% deductible.

According to Pub. 15-B, these rules haven’t changed, just because your corporate deduction is now completely disallowed. It has just become more expensive for the company. If you haven’t done so already, you can specify a dollar limit for employees’ reimbursements. That’s only fair, since employees can’t deduct any unreimbursed expenses on Schedule A.

What are the rules for reimbursing employees’ home internet access?

Question: We don’t require employees to work at home, but most do when the weather is too bad for them to come into the office and they get permission ahead of time. We have cloud access for that. Employees present their cable bills to us and we reimburse their internet access. Must we tax these reimbursements?

Answer: Technically, yes. Under the accountable plan rules, employees must account to you for their business and personal use and their personal use is taxable.

The TCJA removed computers and peripherals from the listed property category, but the IRS hasn’t issued any guidance yet on whether this changes the tax status of employer reimbursements for internet access. As a guide, when Congress removed cell phones from the listed property category, the IRS released favorable guidance under which employers could reimburse employees for their basic monthly phone and data plan charges, and employees who used their own phones for business didn’t have to parse out their business and personal use. It’s not out of the question that the IRS will release similar guidance regarding employers’ reimbursement of employees’ internet access via computers.