Employee Expenses and Reimbursements – Don’t Forfeit the Employer Deduction and Tax-Free Benefit to the Employee
What a “nice” employer. Their employees receive extra funds to cover expenses such as gas, phone, supplies, meals, etc. These are considered business expenses, right? Meaning tax-free funds to the employee and a deduction for the employer. Not so fast! Are you reimbursing these expenses under an accountable plan?
As we approach the end of the calendar year, now is the time to make sure company policies are tightened up and the proper documentation is on hand to ensure that in the event of an audit, you will be able to support the company’s procedures and provide substantiation for any deductions the company takes. It’s easier to gather everything you may need in the present time, rather than to try and go back and collect information years later. Most importantly, no one wants to risk losing a deduction and having to pay tax on the additional income plus interest and penalties.
First, your company should have an accountable reimbursement plan in place for tax-favored treatment of these payments/expenses. An accountable plan is when the employer reimburses their employees for their business-related expenses or pays an expense allowance but requires that all expenses are properly accounted for. This means for every reimbursed item, the employee must submit to the employer an expense record along with receipts and other documentation indicating the expense amount, time and place, business purpose and business relationship to anyone else involved (e.g., a client, vendor, etc.).
In lieu of submitting detailed expense records upfront and then receiving the reimbursement for the costs, the employer may pay a per diem allowance to their employees. In this situation, the employee is receiving the funds upfront; however, this does not eliminate the requirement for the employee to provide an expense record along with receipts to their employer to prove the funds were spent on legitimate business expenses after the fact. In addition, for this arrangement to qualify as an accountable plan, any excess payments the employee receives must be paid back or included in the employee’s wages as taxable compensation. For example, if an employee receives $500/month under an expense account arrangement to cover their business miles driven and cell phone usage and then they only incur $400 in expenses, the additional $100 not spent would either need to be returned to the employer or included as additional taxable compensation.
On a related note, meals provided to an employee are generally tax-free to the employee as a de minimis fringe benefit if the benefit is reasonable and is provided to allow for an extension of the normal workday. In addition, it must be provided only on an occasional basis. If employees get a set rate for meals for each hour worked in excess of the normal eight-hour day, then this fringe benefit would not be considered a tax-free de minimis fringe. There are other rules that apply when an employer provides meals to employees. Specifically, an employer can provide discounted meals to employees (in a cafeteria, for example) and, if certain rules are met, the discount is not taxable to the employees. An employer also can provide tax-free meals on its business premises if the meals are provided “for the convenience of the employer.” Certain de minimis meals can also be provided, such as coffee and soft drinks or occasional parties. Remember, if meals are provided to employees on-premises and meet the “convenience of the employer” test, then they will qualify as a 100 percent deductible expense to the employer.
Finish off this year strong and make sure your company policies are well documented, and the support is organized and easily attainable, to eliminate unnecessary frustrations that could occur in the future. We are always here to be a resource to you; do not hesitate to reach out to us for suggestions or additional clarification on any policies.
Contributing Author: Shannon T. Forkin, CPA, CGMA, is a tax partner with over 18 years of experience in all areas of income taxation to a variety of clients. She concentrates in working with nonprofit, healthcare and professional service clients and provides strategic tax planning relating to taxation issues influencing these industries. Shannon specializes in all areas of corporate and individual income tax compliance, including multi-state taxation.