Expense Accounts– Does Yours Pass IRS Muster?

October 14, 2015 – Many businesses reimburse their employees for expenses incurred while out of the office during business related activities.  It is important for these businesses to consider whether or not they have an “accountable plan.” Under an accountable plan the employer does not report expenses reimbursed to employees as income to the employee. If the business has a plan that does not meet the specific requirements of an accountable plan then the employer reports the reimbursements as income to the employee. This income will be subject to withholdings and employment taxes.

The Internal Revenue Service (IRS) defines the requirements of an accountable plan as follows:

  • The expense must have a business connection
  • The employee must adequately account for expenses
  • The employee must return excess reimbursement within a reasonable period of time

The definition of a “business connection” is that the expense is allowable as a deduction and paid or incurred by the employee while performing services as an employee. Regarding the employee’s responsibility to account for expenses and returns of excess reimbursements the IRS provides several safe harbors.  The substantiation of an expense within 60 days after it is paid or incurred will be deemed reasonable, as will the return of an advance within 120 days. As an alternative the employer may provide its employees with quarterly statements that require them to either account for or return any advances within 120 days of the statement. Additional rules apply to per diem and mileage reimbursements.

Following the IRS requirements for an accountable plan will prevent tax consequences for both the business and their employees.  If you would like us to review your reimbursement plan, please contact your Dopkins Tax Advisor.

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Dopkins Tax Advisory Group

Our more than 25 tax professionals include specialists who are proactive, strategic thinkers who work to maximize your cash flow. In addition to cash flow considerations, we also believe that tax planning is most effective when it is integrated with, and fully supports, your business plan and personal goals. Our approach to tax planning will help you better understand the tax implications of any proposed course of action, and together we can make the right decisions for your business. For more information, contact Robert Pollock, CPA at rpollock@dopkins.com.