IRS Updates Rev. Proc. for TCJA Changes to Auto and Moving Expense Deductions

(Parker Tax Publishing December 2019)

The IRS has modified a 2010 revenue procedure in order to reflect changes made to Code Sec. 67 and Code Sec. 217 by the Tax Cuts and Jobs Act of 2017. The IRS also provides rules for substantiating, under Code Sec. 274(d) and Reg. Sec. 1.274-5, the amount of an employee's ordinary and necessary expenses of local travel or transportation away from home that a payor (an employer, its agent, or a third party) reimburses using a mileage allowance. Rev. Proc. 2019-46.

Background

In Rev. Proc. 2010-51, the IRS announced that it would be publishing the standard mileage rates for the use of an automobile for business, charitable, medical, and moving expense purposes as a separate annual notice rather than as a revenue procedure, as it had done in the past. The IRS stated that the notices would also provide the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate and the maximum standard automobile cost for automobiles under a fixed and variable rate (FAVR) allowance. The IRS noted that, while it was discontinuing the publication of annual revenue procedures, it would publish modifications as required.

The IRS has now published Rev. Proc. 2019-46 which modifies Rev. Proc. 2010-51 to reflect changes made to Code Sec. 67 and Code Sec. 217 by the Tax Cuts and Jobs Act of 2017 (TCJA).

Code Sec. 67(a) generally provides that, in the case of an individual, the miscellaneous itemized deductions for any tax year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income (2-percent floor). TCJA amended Code Sec. 67 by adding Code Sec. 67(g), which temporarily suspends all miscellaneous itemized deductions that are subject to the 2 percent floor for any tax year beginning after December 31, 2017, and before January 1, 2026 (the suspension period). For any tax year during the suspension period, a taxpayer is not permitted to claim miscellaneous itemized deductions, including unreimbursed employee travel expenses. However, in computing adjusted gross income, deductions allowed for expenses that are described in Code Sec. 62(a)(1) (trade and business deductions) or Code Sec. 62(a)(2) (employee trade or business expenses) are not miscellaneous itemized expenses and are therefore not suspended.

Code Sec. 217(a) generally allows a deduction for moving expenses paid or incurred during the tax year by the taxpayer in connection with starting work as an employee or as a self-employed individual at a new principal place of work. The TCJA amended Code Sec. 217 by adding Code Sec. 217(k), which temporarily suspends the deduction for moving expenses for any tax year during the suspension period. However, under Code Sec. 217(g), the suspension of the deduction does not apply to a member of the Armed Forces on active duty who moves pursuant to a military order and incident to a permanent change of station. For any tax year during the suspension period, a taxpayer other than a taxpayer described in Code Sec. 217(g) is not permitted to claim a deduction for moving expenses.

Rev. Proc. 2019-46 also provides rules for substantiating, under Code Sec. 274(d) and Reg. Sec. 1.274-5, the amount of an employee's ordinary and necessary expenses of local travel or transportation away from home that a payor (an employer, its agent, or a third party) reimburses using a mileage allowance. Taxpayers are not required to use the substantiation methods described in Rev. Proc. 2019-46; instead, a taxpayer may substantiate actual allowable expense amounts if the taxpayer maintains adequate records or other sufficient evidence.

Changes Made to Revenue Procedure 2010-51

Rev. Proc. 2019-46 modifies Rev. Proc. 2010-51:

(1) to provide that a taxpayer may not use the business standard mileage rate to claim a miscellaneous itemized deduction during the suspension period;

(2) to provide that a taxpayer may not claim a miscellaneous itemized deduction during the suspension period for parking fees and tolls attributable to the taxpayer using the automobile for business purposes;

(3) to provide that, under Code Sec. 1016(a)(2), a taxpayer must reduce the basis of an automobile used in business by the greater of the amount of depreciation the taxpayer claims for the automobile or the amount of depreciation allowable and, if a taxpayer uses the business standard mileage rate to compute the expense of operating an automobile for any year, a per-mile amount (published by the IRS in an annual notice) is treated as the depreciation claimed by the taxpayer and the depreciation allowable for those years in which the taxpayer used the business standard mileage rate;

(4) to provide that a taxpayer may not use the business standard mileage rate to claim a miscellaneous itemized deduction during the suspension period for unreimbursed travel expenses;

(5) to provide that a taxpayer who pays or incurs unreimbursed employee travel expenses during the suspension period that are deductible by the taxpayer in computing adjusted gross income may use the business standard mileage rate to compute an adjustment to gross income;

(6) to provide that the deduction for moving expenses during the suspension period does not apply unless the taxpayer is a member of the Armed Forces on active duty moving pursuant to a military order and incident to a permanent change of station.

(7) to provide that in using the FAVR allowance, an employee may not claim a miscellaneous itemized deduction during the suspension period for parking fees and tolls attributable to the employee driving the standard automobile in performing services as an employee;

(8) to provide that if during the suspension period, an employee's substantiated expenses are less than the employee's actual expenses, the employee may not claim an itemized deduction for the excess amount;

(9) to provide that an employee's amount computed for the business standard mileage rate is an itemized deduction subject to the 2-percent floor and is not deductible during the suspension period; and

(10) to clarify that amounts paid under a mileage allowance to an employee regardless of whether the employee incurs deductible business expenses are treated as paid under a nonaccountable plan.

For a discussion of reimbursement and other expense allowance arrangements, see Parker Tax ¶91,125. For a discussion of substantiation requirements for business-related expenses, see Parker Tax ¶91,130.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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