Repayments Under U.S. Payback Agreements No Longer Deductible

A little noticed effect of the Tax Cuts and Jobs Act (TCJA) is that repayments required of employees under agreements to repay relocation costs if the employee leaves within a short time will no longer be deductible.

Relocation is expensive. Companies want to make sure they receive some benefit in the form of future services for the costs incurred to move an employee. Therefore, relocation programs generally incorporate provisions requiring employees to repay all or a part of the expenses incurred to relocate them unless they continue to work for the company for a specified period.

When the employee does in fact leave early, the tax treatment of the employee’s repayment of costs becomes an issue. Repayments in the same year as the move are not at issue, because such repayments are accounted for by simply adjusting withholding and payroll taxes. No deduction by the employee is necessary. However, if the repayment is in a year subsequent to the move the employee has historically been allowed to claim a deduction for the repayment.

In Rev. Rul. 79-311, 1979-2 C.B. 25, the United States Internal Revenue Service (IRS) held that an employee who erroneously received wages and repaid them in a subsequent year was entitled to an itemized deduction as an employee business expense. Rev. Rul. 79-311 has been applied to repayment of moving expenses in PLRs 9050053 and 9313015 (IRS private letter rulings). 

Such a deduction, however, would be a “miscellaneous itemized deduction”. The TCJA suspended the availability of miscellaneous itemized deductions beginning in 2018 through 2025. Therefore, repayments in years subsequent to the move are no longer deductible. 

An alternative to an itemized deduction was to claim an adjustment under section 1341 (the so-called “claim of right” provision). Section 1341 provides that when a taxpayer restores a substantial amount (defined as exceeding $3,000) received under a claim of right, the taxpayer can either claim the allowable deduction in the year of restoration, or recompute the tax for the year in which the amount was received and claim a deduction in the current year for the amount the taxes would have been reduced in that prior year, whichever is most beneficial. The section 1341 adjustment is not subject to the 2 percent floor which was applicable to miscellaneous itemized deductions. 

However, section 1341 is not applicable unless a deduction was allowable for the current year in the first place. Therefore, it cannot be used beginning in 2018 for repayments under payback agreements.

How This Affects Mobility

Repayments after the year of the move are no longer deductible and that may have serious consequences. Repayments tend to be substantial. Therefore, the loss of deductibility by the employee may be quite painful from a financial standpoint, and may inhibit companies’ efforts to enforce payback agreements. 

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