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The tax landscape around moving expenses has seen significant changes in recent years, and it’s crucial for business owners to stay informed about the current rules. While the moving expense deduction was once a widely available tax break, its availability is now heavily restricted. For tax years through 2025, the deduction and the exclusion from gross income for moving expense reimbursements have been suspended for most taxpayers, except for active-duty members of the Armed Forces.
Understanding the Moving Expense Deduction Suspension
Under the Tax Cuts and Jobs Act (TCJA) of 2017, the moving expense deduction has been suspended for most taxpayers through 2025. This suspension means that unless you’re an active-duty servicemember moving under military orders, you cannot deduct moving expenses on your federal income tax return. Additionally, employers’ reimbursements for moving expenses are now considered taxable income for most employees, adding a layer of complexity for businesses offering relocation assistance.
Exceptions for Active Duty Military Personnel
Active-duty servicemembers and their families remain eligible to deduct moving expenses if the move is related to a permanent change of station (PCS). Qualifying expenses for service members include:
- The cost of transporting household goods and personal effects
- Travel expenses, including lodging (but not meals), for the individual and their family members
Foreign moves have their own set of rules, allowing servicemembers to deduct expenses such as the storage of household goods and transportation to and from a storage facility. However, a move from a foreign country back to the United States is not considered a foreign move, which can impact what expenses are deductible.
Non-Deductible Expenses
For business owners assisting employees with relocation, it’s important to note what moving-related expenses are not deductible, including:
- The cost of meals during the move
- Temporary living expenses or house-hunting trips before or after the move
- Expenses related to buying or selling a home, including real estate taxes and mortgage penalties
In addition, lavish lodging and other extravagant expenses are not deductible. As a business owner, you should be aware of these limits when structuring any employee relocation packages to avoid unnecessary tax complications.
How Reimbursed Moving Expenses Are Treated
If an employer reimburses an employee for eligible moving expenses, the amount must be reported in the employee’s income. However, the portion of reimbursed moving expenses that qualifies for the exclusion (for active-duty military members) is not included in taxable wages. It’s crucial for businesses to ensure these reimbursements are reported correctly on Form W-2, particularly in box 12 under code “P” for nontaxable moving expense reimbursements.
For businesses that have employees impacted by relocation, it’s worth considering how this tax treatment affects the overall cost of employee benefits. Offering to cover moving expenses could add to the employee’s tax burden unless proper planning and structuring are in place.
Filing Requirements: Form 3903 for Deducting Moving Expenses
For service members who qualify for the moving expense deduction, they must file Form 3903 to claim the deduction. The key information from Form W-2, including any reimbursements shown in box 12, helps determine whether the deduction applies. If the employee’s reimbursed expenses exceed their actual moving expenses, Form 3903 is used to calculate the deduction.
Business owners employing servicemembers should ensure that their employees understand the filing requirements to maximize their tax benefits and avoid potential errors when claiming moving expenses.
Key Considerations for Employers Offering Relocation Assistance
For business owners who offer relocation assistance to employees, it’s vital to be aware of the tax consequences of reimbursed moving expenses. Because most employees can no longer exclude these reimbursements from income, they’ll face a higher tax burden on relocation benefits. To mitigate this, businesses should consider alternative compensation structures or offering gross-up payments to cover the additional taxes on these benefits.
Furthermore, proper documentation and reporting are essential to ensure compliance with IRS guidelines. For employees who qualify for the deduction, failure to properly account for moving reimbursements can result in penalties or disallowed deductions.
Conclusion
The suspension of the moving expense deduction has drastically reduced its availability, but for those who still qualify, such as active-duty military personnel, it remains an important tax benefit. Business owners should stay informed about these changes to avoid potential pitfalls when offering relocation benefits and ensure that all reporting is done in compliance with the current tax code.
For personalized tax advice on moving expenses or other deductions, it’s always best to consult with a tax professional. Proper planning and structuring of benefits can help both employers and employees minimize their tax burden.
