The reporting of employer expense reimbursements by employees will vary based on whether the employer reimburses under an accountable or nonaccountable plan. This article will briefly discuss the two types of expense reimbursement plans and what the tax consequences are for the employee.
To qualify as an accountable plan, the employer’s reimbursement arrangement must require all of the following:
- The employee’s expenses must be connected to the business. This means that the employee must have paid or incurred deductible expenses while performing services as an employee.
- The employee must adequately account to the employer for the expenses within a reasonable period of time.
- Any excess reimbursement must be returned to the employer within a reasonable period of time.
On the other hand, nonaccountable plans are reimbursement arrangements that do not meet one or more of the requirements listed above. For example, an employee who is reimbursed under an accountable plan, but fails to return, within a reasonable time, excess reimbursements. In this example, the excess reimbursements would be treated as if paid under a nonaccountable plan. In addition, if an employee is repaid for business expenses by reducing the amount reported as wages, it will be considered a nonaccountable plan.
What is a Reasonable Period of Time?
The IRS states that a reasonable period of time depends on the facts and circumstances of each situation. However, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time:
- Employee adequately accounts for expenses within 60 days after they were paid or incurred.
- Employee returns any excess reimbursement within 120 days after the expense was paid or incurred.
- Employee is given 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 statement.
What is Adequate Accounting?
The second requirement for an accountable plan says that the employee must adequately account to the employer for expenses. Examples of adequate accounting by the employee include providing the employer a statement of expense, account book, diary, or similar record in which the expense is entered at or near the time it was paid. The employee also must provide documentary evidence, like receipts, of travel, mileage, and other business expenses.
It’s important to note that the employee must provide the employer with the same type of records and supporting information that would have to be provided to the IRS if the IRS questioned a deduction on the tax return.
So why does it matter if your employer uses an accountable or nonaccountable plan? It matters because it affects how you will report the reimbursements and expenses for tax purposes. Expense reimbursements under accountable plans should not be included in box 1 wages on the employee’s Form W-2. In addition, as long as the expenses equal the reimbursements, the employee should not file Form 2106 to report employee business expenses nor claim a deduction.
In the case of reimbursements under a nonaccountable plan, the employer will include the amount of reimbursements in box 1 wages on Form W-2. The employee must complete Form 2106 and itemize deductions to deduct business expenses. Only the business expenses greater than 2% of adjusted gross income will qualify for a deduction on Schedule A of Form 1040.
Whether a reimbursement arrangement is an accountable or nonaccountable plan is determined based on whether the plan meets all three requirements of an accountable plan. While accountable plans have requirements that must be met, they could be viewed as more favorable to employees for tax reporting purposes.
If you have questions about your expense reimbursement plan – as an employer or an employee – please contact us to discuss.