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What You Should Know: Employee Reimbursements

Are you up to date on what satisfies the IRS requirement for an Accountable Plan for reimbursements?

Your company wants to reimburse employees for business expenses because post Tax Cuts and Jobs Act they can no longer deduct unreimbursed business expenses on their individual tax return.  But did you know that a business is required to reimburse employees under an Accountable Plan in order for the reimbursed amounts not to be included in compensation (box 1 of the W-2)?

Here’s what you should know about IRS compliant Accountable Plans:

What does it mean to have an Accountable Plan?

These three requirements must all be met for a plan to be considered accountable:

  • Business connection to the expenditure
  • Adequate accounting by the recipient within a reasonable period of time
  • Excess reimbursements are returned within a reasonable period of time

What is considered adequate accounting?

  • This means that you have a policy in place that requires the employee to verify the date, time, place, amount and business purposes of the expenses.  This policy does not have to be in writing but it is helpful to your employees as it establishes expectations.
  • Receipts are generally required for expenditures of $75 or more (unless the per diem rate as published by the IRS is applied for specified expenditures)

Additional items to consider:

  • Entertainment expense reimbursements must be treated as wages.  
  • The level of paperwork required for proving internet and telephone expenses have a business connection can be daunting.  While these can be reimbursed under an accountable plan, many choose to treat these as a working-condition fringe benefit (taxable compensation).

If your company is not currently reimbursing expenses under an accountable plan, these reimbursements could be considered taxable wages to your employee.  Reimbursing expenses under an accountable plan also protects your associated business tax deduction.  Please evaluate your current policies or ask your LUCA team member for assistance.

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