Important Employee Expense Information
August 21, 2013
We are posting another in our series of correspondence regarding the tax treatment of certain income and deductions on your tax returns so that you can better understand tax consequences and the reason that we request certain information from you at the time we prepare your tax returns. The tax treatment of expenses incurred in connection with your employment depends on the arrangement you have with your employer. In particular it depends on whether you are reimbursed for your costs and, if so, under what type of arrangement.
If your employment-related expenses aren't reimbursed by your employer they are deductible, but only as a “miscellaneous itemized deduction.” This means they are grouped together with other miscellaneous items and are only deductible as an itemized deduction to the extent the total exceeds 2% of your adjusted gross income (AGI).
Accountable reimbursement plans
An accountable plan is one under which your employer reimburses you for your employment-related expenses (or pays you an expense allowance) but requires you to “adequately account” for the expenses. This means you must submit to the employer an expense record (account book, diary, expense statement, etc.) 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, supplier, etc.).
In lieu of submitting detailed expense records, your employer may pay you a per diem allowance. IRS provides a number of ways of calculating the per diem amount, including the regular federal per diem rate, the standard meal allowance, and the high-low substantiation method.
For the plan to qualify as an accountable plan, it must also require you to pay back any excess payments you receive. For example, say you receive $1,000 under an expense account arrangement and only incur $800 in expenses. In order for the plan to qualify as accountable, it would have to require you to return the $200 not spent.
If you are reimbursed (or receive an allowance) for expense under an accountable plan, the tax treatment is simple: do nothing. The transaction is treated as a wash. The reimbursement or allowance should not be included in your income on the W-2 form you receive from your employer and you don't take a deduction for the expenses on your income tax return.
If your employer only reimburses (or gives you an allowance for) part of your costs, you can claim a deduction for the excess expenses that actually came out of your pocket. In this case, however, only the expenses are deductible as a miscellaneous itemized deduction as discussed above.
Nonaccountable reimbursement plans
If your employer doesn't maintain an accountable plan, any expense reimbursements or allowances you receive from your employer will be included in your wages on the W-2 form you receive from the employer. You then separately deduct your expense as a miscellaneous itemized deduction, again subject to the 2% floor. This system may operate unfairly from your perspective.
Economically it is always best to obtain a full reimbursement, via the accountable or unaccountable plan from your employer. While the unreimbursed expenses under the accountable plan are an allowable miscellaneous itemized deduction, the tax benefit is often limited by Alternative Minimum Tax which mitigates the tax savings, and these deductions are often the subject of federal and state income tax examinations. It is preferable to have an accountable plan in place. However, some employers don’t want to assume the administrative responsibilities for verification of the expenses and retention of the supporting documentation. They prefer to use the nonaccountable plan because they avoid the administrative responsibilities even though the inclusion of the expense allowance in compensation results in higher employer related payroll tax expenses.
As always, we are happy to discuss any questions that you have regarding this subject. Please do not hesitate to contact us to discuss any questions that you have.
Scott B. Price & Company