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 Marc Levine is Director of
Tax Services at Horovitz,
Rudoy & Roteman, a top 20
CPA and Business Advisory
Firm serving the South
Western Pennsylvania region.
Marc provides tax consulting
and planning services to
a variety of individual and
business clients.
Reimbursing Employee T & E Expenses
If you reimburse all or part of your employees’ travel and
entertainment expenses, how you reimburse your employees
determines the way your company and your employees must treat these
reimbursements for income-tax purposes. Reimbursements made to
employees under an accountable plan are not subject to payroll or
income-tax withholding, but reimbursements paid under nonaccountable
plans are reported as pay.
Accountable Plans
An accountable plan is one that pays for business-related out-of-town
lodging and meal expenses and business entertainment expenses on a
dollar-for-dollar basis. Payments to employees can be made through
advances, direct reimbursements, charges to a company charge card, or
direct billings to your company.
To be considered an accountable plan by the IRS, your
reimbursement plan must contain each of the following three elements:
Reimbursed expenses must have a clear business connection – they
must have been incurred by your employees while performing services
on your behalf.
Your employees must adequately account for their expenses within
a reasonable period of time (see the definition below). That means
they are required to submit documentary evidence of their travel,
mileage, and other employee business expenses, along with a statement
of expense, an account book, a diary or a similar record in which
expenses are entered. the employee must give you the same type of
records and supporting information that they would have to give to the
IRS if the IRS questioned an employee business expense deduction on
the return of an employee whose employer doesn’t have an accountable
plan. For business travel, that means a written record of the departure
and return dates, trip destination, trip purpose, and amount spent on
travel expenses. Receipts must be kept for all lodging and other
expenses of $75 or more.
Employees must return any excess payments (if a cash advance has
been made) within a reasonable period of time. An excess payment is
any amount paid to an employee that exceeds the expenses accounted
for by the employee.
Employees can also be given a flat per diem or daily rate for outof-
town travel no matter what the employee actually spends for
lodging, meals, and incidental expenses. If the per-diem allowance
does not exceed government-approved rates, employee record-keeping
requirements are minimal. Employees just have to submit a written
report or statement indicating when and where T&E expenses were
incurred, but need not submit bills and receipts.
What Is a “Reasonable Period” of Time?
The definition of reasonable period of time can vary based on
individual circumstances, but actions that take place within the times
specified below will be treated as taking place within a reasonable
period.
Employees receive an advance within 30 days of the time they
incur an expense.
Employees adequately account for their expenses within 60 days
after they were paid or the expense was incurred.
Employees are required to return any excess reimbursement within
120 days after the expense was paid or incurred.
Tax Implications of an Accountable Plan
If your company has an accountable plan, you do not have to include
any T&E reimbursements on your employees’ W-2 forms, and your
employees do not have any IRS reporting requirements because their
expenses and reimbursements are equal. You can deduct 50 percent of
employee business entertainment expenses, 50 percent of employee
reimbursements for meals while in travel status, and 100 percent of all
other reasonable employee travel expenses.
Non-accountable Plans
A non-accountable plan is a reimbursement or expense arrangement
that does not meet one or more of the three rules listed above for
accountable plans. If your company does not have an accountable
plan, you need to combine the amount of any reimbursement or other
expense allowance paid to your employees under a non-accountable
plan with employee wages, salary, or other pay. You report the total in
box 1 of Form W-2. Employees must complete Form 2106 or 2106-
EZ and itemize their deductions in order to deduct their expenses for
travel, transportation, meals, or entertainment. Employee meal and
entertainment expenses are subject to a 50 percent deduction limit.
In addition, total expenses are subject to the 2 percent -of-adjustedgross-
income limit that applies to most miscellaneous itemized
deductions. Use of a non-accountable plan, thus, essentially shifts the
paperwork burden to the employee, as well as causing an increase in
the employee’s reportable gross income.
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