Posted by Income Taxes and Bookkeeping LLC

Accountable & Non Accountable Plans of Employee Expense Reimbursements

Accountable & Non Accountable Plans of Employee Expense Reimbursements

Employee expenses are no longer deductible. Nevertheless, if the employer reimburses the employee under an accountable plan, the reimbursements should not be reported as income by the employee. On the other hand, if the costs are not reimbursed, they cannot be deducted. Only qualified performing artists, armed forces reservists, state or local government employees who pay taxes, and employees with work expenses related to a disability can deduct employee business expenses on Form 2106 or Form 2106-EZ.

Accountable plans

An accountable plan requires the employee to pay all expenses by submitting a record, receipts, or other justification to the employer. Also, any overpayment or indemnity must be returned to the employer, i.e., any amount not recorded as a normal and necessary business expense. Records are usually kept in a journal or register. The justification is provided by appropriate records, which must indicate the number of expenses, the time and place of the trip or entertainment, the purpose of the activity, and the business relationship between the taxpayer and the persons receiving the gift or being entertained. Also, accommodation costs and any other expense of $75 or more must be accompanied by documentary proof, such as receipts or credit card statements, to prove the expense; otherwise, the taxpayer may be required to provide a written or oral statement detailing the expense.

If business data is not provided with expenses for a given day, the employee must return the per diem rate for those days to the employer to maintain the plan as an accountable plan. Deductions exceeding the daily rate are taxable as wages. Since the deductibility of meal and entertainment expenses is limited to 50% of its cost, if the employer has not done so, the employee may be required to allocate any expense in excess of reimbursements between meals and entertainment expenses.

Although an employer can only deduct 50% of eligible food and entertainment expenses, the employee can be reimbursed for the full cost under an accountable plan without being reported as salary. However, reimbursements for travel expenses of the spouse of an employee are treated as wages for the employee unless the spouse is part of the trip for a business purpose.

For the accountable plan, the advances, the justification of the expenditure, and the restitution of the surplus must be made within a reasonable time after the actual occurrence of the expenditure. The Internal Revenue Service provides safe harbor status for the following periods:

  • Advance payment made within 30 days before the expenses are to incurred or paid;

  • Return of excess refunds within 120 days of payment of the expense.

  • Substantiation provided within 60 days of payment of expenses;

Deemed Substantiation for a per diem allowance

Federal law does not need substantiation if expenses do not exceed the federal budget in reducing documentation and expense records. The government pays employees a certain amount for accommodation, food, and other expenses when a federal employee has to travel to another city for work. This allowable amount is called the federal per diem rate. If an employer grants a per diem allowance, a specific dollar amount per day, the amount of expenditure is considered justified if the allowance does not exceed the federal per diem rate. However, the employee should further document the location, dates, business purpose, and business relationship of the parties involved in a transaction. The per diem rate covers other expenses, including tips to help people and the cost of laundry and cleaning. Federal per diem rates are announced at least once a year in IRS Pub. 1542.

The federal per diem rate varies by location, with more expensive areas having higher rates. As the cost of lodging varies widely, there is no per diem rate for lodging, so you need to keep track of your spending.

The per diem does not apply if the employer and the employee are related or if the employee is also a shareholder holding more than 10% of the shares of the company. Reimbursement under an accountable plan should not be reported as income.

Unaccountable plans

An unaccountable plan is a plan that does not follow the tax rules of an accountable plan, which means that the employer does not need accounting or to return the excess allowance to the employer, in which case the expenses must be reported as salary to the employee on W-2, wages, and tax statement.

If the employer has requested an accounting of expenses and reimbursement of excess allowance, but the employee has not done so, the plan is still considered a nonaccountable plan.

Since 2018, according to the TCJA, employees will no longer be able to deduct unpaid business expenses, such as a home office or the use of a vehicle. Then it would be for the employees to claim reimbursement under an accountable plan.

Reporting Requirement

If all employee expenses are reimbursed according to an accountable plan, there will be no reporting obligation. However, suppose certain expenses are not reimbursed according to an accountable plan. In that case, only a qualified employee (qualified performing artists, military reservists, paid state or local employees, and employees with disability-related work expenses) should report the reimbursement and the expenses on Form 2106 or Form 2106-EZ.



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