An employer may reimburse an employee for travel, meals, and entertainment expenses incurred while performing services for the employer. The tax treatment of the reimbursement, including per diem allowances, depends on whether the employer has an “accountable plan” or a “nonaccountable plan.”
If expenses are reimbursed under an accountable plan, the employer deducts the amount allowable as travel, meals, and entertainment expense, and the employee excludes the reimbursement from income.
If the expenses are reimbursed under a nonaccountable plan, the employer reports the reimbursement as taxable wages to the employee on Form W-2 and takes a wage expense deduction. Effective for 2018, the employee is no longer allowed to take a deduction on his or her income tax return for the expenses. New tax law repealed the 2% miscellaneous itemized deductions.
To qualify as an accountable plan, employees must:
Have paid or incurred deductible expenses while performing services as an employee,
Adequately account to the employer for these expenses within a reasonable period of time, and
Return any excess reimbursement or allowance within a reasonable period of time.
An arrangement under which the employer advances money to the employees is treated as meeting (3), above, only if the following requirements are also met.
Excess reimbursement. Any amount advanced to the employee that exceeds the amount adequately accounted for by the employee must be returned to the employer within a reasonable period of time.
If a reimbursement arrangement provides for meal expenses in excess of the federal per diem rate, there must be a mechanism in place to track the actual expenses for purposes of returning the excess to the employer. If such a mechanism is not in place, the entire amount of reimbursement is included in the employees’ taxable wages, not just the amount in excess of the federal per diem.
Reasonable period of time. Facts and circumstances determine what is reasonable in a given situation. Actions that take place within the following list will be treated as taking place within a reasonable period of time.
The employer reimburses an expense within 30 days of the time the employee incurred the expense.
The employee adequately accounts for the expense within 60 days after the expense was paid or incurred.
The employee returns any excess reimbursement within 120 days after the expense was paid or incurred.
The employer gives the employee a periodic statement, at least quarterly, that asks the employee to either return or adequately account for outstanding advances, and the employee complies within 120 days of the date of the statement.
Reimbursement not requested. When an employee has a right to reimbursement for expenses related to his or her status as an employee but fails to claim reimbursement, the expenses are not deductible since they are not considered necessary expenses.
Court Case: The taxpayer’s job involved extensive traveling in a two-state area. His employer had a policy under which employees were eligible for reimbursement of all types of nonvehicle business expenses. The taxpayer did not submit any expenses for reimbursement from his employer. Instead, he deducted the expenses as unreimbursed business expenses on his tax return. The court noted that it was not necessary for the taxpayer to remain unreimbursed for the expenses. To the extent the expenses could have been reimbursed, the court disallowed the taxpayers claimed deductions. (Stidham, T.C. Summary 2012-61)
Any form of reimbursement that does not meet the accountable plan rules is a nonaccountable plan. All amounts paid, or treated as paid under a non-accountable plan are reported as wages on Form W-2. The payments are subject to income tax withholding, Social Security, Medicare, and federal unemployment taxes.
There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event.