Spring 2008 issue of Horizons

knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

If expenses are reimbursed under an accountable plan, the employer deducts the amount allowable as travel, meals and entertainment expense. The amounts are not treated as income to the employee; therefore, no amounts are required to be included on the employee’s W-2, no employment taxes need to be paid, etc. The 50 percent limitation on the deduction for meals and entertainment applies to the employer’s deduction of meals and entertainment expenses that are reimbursed. The employee excludes the reimbursement from income. Under a non-accountable plan, the IRS rules require the employer to report the reimbursement as taxable wages to the employee on Form W-2. The employer receives a deduction for compensation expense but also is required to withhold income and Social Security taxes. The employer also is responsible for the employment taxes on the payment. The employee is allowed to deduct business expenses that are reimbursed under a non-accountable plan, as well as expenses that are not reimbursed, as miscellaneous itemized deductions. The portion of the expenses representing meals and entertainment is subject to the 50 percent limit on deductions for meals and entertainment. As miscellaneous itemized deductions, these expenses also are subject to the 2 percent of Adjusted Gross Income limitation. These limitations result in the employee paying tax on a portion of the payment. Accountable Plan To qualify as an accountable plan, employees must: 1) Have paid or incurred deductible expenses while performing services as an employee; 2) Adequately account to the employer for these expenses within a reasonable period of time; and 3) 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 the third requirement above only if the following requirements also are met: a) The advance is reasonably calculated not to exceed the amount of anticipated expenses. b) The employer makes the advance within a reasonable period of time.

Adequate Accounting Employees must adequately account to the employer for their travel, meals and entertainment expenses. They must give the employer documentary evidence of their travel, mileage and other employee business expenses. This evidence should include items such as receipts, along with a statement of expenses, an account book, a day planner or similar record in which the employee has entered each expense at or near the time the expense was incurred. To minimize the administrative effort required to meet these rules, the employer may use a per diem plan. The rules of per diem plans are discussed below. 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. Reasonable Period of Time Interpretation of a “reasonable period of time” depends upon the facts and circumstances of the situation. Actions that take place within the periods listed below will be treated as occurring 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. • • • •

20 u spring 2008 issue