Accountable Plans Introduction
Daily car Log Weekly Travel Expense Weekly Travel Expense on Excel(c)
What Are The Qualifications? To The Employer
To be an accountable plan, your employer's reimbursement or allowance arrangement must include all three of the following rules.
"Adequate accounting" and "returning excess reimbursements" are discussed later.
An excess reimbursement or allowance is any amount you are paid that is more than the business-related expenses that you adequately accounted for to your employer. See Returning Excess Reimbursements, later, for information on how to handle these excess amounts.
The definition of reasonable period of time depends on the facts and circumstances of your situation. However, regardless of the facts and circumstances of your situation, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time.
To The Employee
Employee meets accountable plan rules. If you meet the three rules for accountable plans, your employer should not include any reimbursements in your income in box 1 of your Form W-2. If your expenses equal your reimbursement, you do not complete Form 2106. You have no deduction since your expenses and reimbursement are equal.
If your employer included reimbursements in box 1 of your Form W-2 and you meet all three rules for accountable plans, ask your employer for a corrected Form W-2.
Accountable plan rules not met. Even though you are reimbursed under an accountable plan, some of your expenses may not meet all three rules. Those expenses that fail to meet all three rules for accountable plans are treated as having been reimbursed under a nonaccountable plan (discussed later).
Reimbursement of nondeductible expenses. You may be reimbursed under your employer's accountable plan for expenses related to that employer's business, some of which are deductible as employee business expenses and some of which are not deductible. The reimbursements you receive for the nondeductible expenses do not meet rule (1) for accountable plans, and they are treated as paid under a nonaccountable plan.
Example. Your employer's plan may reimburse you for travel expenses while away from home on business and also for meals when you work late at the office, even though you are not away from home. The part of the arrangement that reimburses you for the nondeductible meals when you work late at the office is treated as paid under a nonaccountable plan.
The employer makes the decision whether to reimburse employees under an accountable plan or a nonaccountable plan. If you are an employee who receives payments under a nonaccountable plan, you cannot convert these amounts to payments under an accountable plan by voluntarily accounting to your employer for the expenses and voluntarily returning excess reimbursements to the employer.
One of the three rules for an accountable plan is that you must adequately account to your employer for your expenses. You adequately account by giving your employer documentary evidence of your travel, mileage, and other employee business expenses, such as receipts, along with either a statement of expense, an account book, a diary, or a similar record in which you entered each expense at or near the time you had it.
You must account for all amounts you received from your employer during the year as advances, reimbursements, or allowances. This includes amounts you charged to your employer by credit card or other method. You must give your employer the same type of records and supporting information that you would have to give to the IRS if the IRS questioned a deduction on your return. You must pay back the amount of any reimbursement or other expense allowance for which you do not adequately account or that is more than the amount for which you accounted.
Substantiation of Employees' Expenses
Substantiation of employee expenses.--Employees are generally required to substantiate their business expenses for travel, entertainment, business gifts, and the use of listed property (including cars) by adequate records as to amount, time, place, business purpose, and, in the cases of entertainment and gifts, the business relationship of the expense. The Cohan rule is expressly overruled for such expenses. Thus, without appropriate substantiation, no deduction will be allowed, and a court may not approximate the amount of deductible expenses on the basis of the taxpayer's unsupported testimony (Reg. §1.274-5T(a)).
In Court - no oral testimony ?
§1.274-5T Substantiation requirements (temporary).-- Paragraph (a) In general.
For taxable years beginning on or after January 1, 1986, no deduction or credit shall be allowed with respect to--
(1) Traveling away from home (including meals and lodging),
(2) Any activity which is of a type generally considered to constitute
entertainment, amusement, or recreation, or with respect to a facility used in
connection with such an activity, including the items specified in section 274(e),
(3) Gifts defined in section 274(b), or
(4) Any listed property (as defined in section 280F(d)(4) and §1.280F-6T(b)),
unless the taxpayer substantiates each element of the expenditure or use (as described in paragraph (b) of this section) in the manner provided in paragraph (c) of this section. This limitation supersedes the doctrine founded in Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). The decision held that, where the evidence indicated a taxpayer incurred deductible travel or entertainment expenses but the exact amount could not be determined, the court should make a close approximation and not disallow the deduction entirely. Section 274(d) contemplates that no deduction or credit shall be allowed a taxpayer on the basis of such approximations or unsupported testimony of the taxpayer. For purposes of this section, the term "entertainment" means entertainment, amusement, or recreation, and use of a facility therefor; and the term "expenditure" includes expenses and items (including items such as loss and depreciation).
Alternative Records
§1.274-5T Substantiation requirements (temporary).-- Paragraph (j) Authority for an optional method of computing meal expenses while traveling away from home.
The Commissioner may establish a method under which a taxpayer may elect to use a specified amount or amounts for meals while traveling away from home in lieu of substantiating the actual cost of meals. The taxpayer would not be relieved of substantiating the actual cost of other travel expenses as well as the time, place, and business purpose of the travel. See paragraphs (b)(2) and (c) of this section.
Per diem allowances may be able to be used in lieu of actual substantiation of expenses (see ¶14,417.1492).
Per diem allowances for meals and lodging "away from home."--
In lieu of substantiating actual travel-related meals and lodging costs, the IRS has set
forth optional "per diem" allowances, which employers and
employees are deemed to have substantiated by adequate records or other sufficient
evidence. The per diem amounts also satisfy the requirement that an employee provide an
adequate accounting to his employer of meal and lodging expense amounts. Per diem amounts,
as opposed to actual costs, may be used only if the time, place and business purpose of an
employee's travel are substantiated in accordance with the rules of Temp. Reg.
§1.274-5T(c). (Rev. Proc. 93-50 (see .421, below).)
Use of a per diem allowance is not limited to employer-employee
relationships; it may be used in connection with arrangements between any
payor and payee, such as between independent contractors and a customer. The term
"employee," as used below, should be read to include any payee.
Basically, the per diem methods address two types of reimbursement arrangements:
(1) a per diem allowance for an employee's meals and incidental expenses only (M & IE only); or
(2) a per diem allowance for an employee's lodging, meals and incidental expenses (lodging plus M & IE).
A "per diem allowance" may be used to substantiate expenses incurred or paid and reimbursed after 1988 only if payment is made under a reimbursement or other expense allowance arrangement that meets the "accountable plan" requirements (see .1491, above) and that
(1) is paid for ordinary and necessary business expenses incurred, or which the employer reasonably expects will be incurred, by an employee for lodging, meals and incidentals in connection with the employee's business travel away from home,
(2) is reasonably calculated not to exceed the amount of the expenses or anticipated expenses, and
(3) is paid at the applicable federal per diem rate or other IRS-specified
rate or schedule or is paid under a "flat rate or schedule." A flat rate or
schedule refers to any uniform and objective basis for computing travel allowances, such
as the number of days away from home or any other basis that is in accordance with normal
business practices--for instance, an hourly amount to cover M & IE of a pilot or
flight attendant or a
cents-per-mile amount to cover M & IE of a long-distance truck driver.
However, an allowance that is computed on a basis similar to that used in computing the employee's wages or other compensation (such as the number of hours worked, miles traveled, or pieces produced) does not meet the business connection requirement of Reg. §1.62-2(d) (see ¶6006.0322), is not a per diem allowance, and is not paid at a flat rate or stated schedule unless, as of December 12, 1989, (1) the allowance was identified by the payor either by making a separate payment or by specifically identifying the amount of the allowance, or (2) an allowance computed on that basis was commonly used in the industry in which the employee is employed (Rev. Proc. 93-50, Sec. 3.03(2), .421, below).
The applicable per diem amount depends on the locality of travel. For travel within the continental United States (CONUS) and for foreign and non-foreign travel outside the continental 48 states (OCONUS), separate lodging and M & IE rates are published and reproduced in a table at .625, below. According to the IRS, the locality of travel for any day is the place where the employee stops for sleep or rest.
Payees related to the payor, within the meaning of Code Sec. 267(b) (using a 10% common ownership standard (see ¶14,161.01)), cannot use per diem amounts for substantiation purposes. Such payees must be prepared to substantiate actual expenses, even if the payor and payee have established a reimbursement r standard allowance arrangement.
Per diem allowance exceeding federal rates. If a per diem allowance under either the M & IE-only method or the lodging-plus-M & IE method exceeds the federal rates for M & IE or lodging plus M & IE, then an employee is required to report in gross income the portion of the per diem allowance exceeding the amount computed using the federal rates. The excess portion is treated as paid under a nonaccountable plan; thus, it must be reported on the employee's Form W-2 and is subject to income and employment tax withholding.
The accountable plan requirements may be met even if the employee is not required to return excess amounts, so long as the arrangement providing per diem allowance requires the employee to return any portion of the allowance within a reasonable period of time (see ¶6006.0327) that relates to days of travel not substantiated.
Example (1): John Adams travels to New York City on business for his employer and receives an advance per diem allowance for meals and incidental expenses of $200, based on an anticipated five days of travel at $40 per day. Assume the applicable federal M & IE rate for New York City is $38. John substantiates three full days of business travel. The accountable plan requirement that John return excess amounts will be satisfied if he is required to return the allowance attributable to his two unsubstantiated days of travel ($80) within a reasonable period of time. It is not necessary for the plan to require John to return the portion of the allowance ($6) that exceeds the amount deemed substantiated ($114) for his three days of substantiated business travel. However, the excess portion ($6) of the allowance is treated as paid under a nonaccountable plan and is reported as wages or other compensation on John's Form W-2, and is subject to withholding and payment of employment taxes.
No double reimbursement or deduction. If a payor pays a lodging-plus-M & IE or an M & IE-only per diem allowance in lieu of reimbursing actual expenses, any additional payment with respect to these expenses is treated as paid under a nonaccountable plan, is included in the employee's gross income, is reported as wages or other compensation on the employee's Form W-2, and is subject to withholding and payment of employment taxes. Similarly, an employee or self-employed person who uses the M & IE-only method to compute the allowable deduction for unreimbursed travel meals and incidentals (see .1495, below) may not claim any other deduction with respect to those expenses.
Example (2): Mr. Luis Perez receives a per diem allowance from his
employer for lodging, meal, and/or incidental expenses incurred while
traveling away from his home in Chicago, Illinois. While in Chicago, Luis pays for dinner
for himself and two business associates. His employer
reimburses as a business entertainment meal expense the costs for the meal for Luis and
the two business associates. Because the employer also pays a per diem allowance to cover
the cost of Luis's meals, the amount paid by the employer for Luis's portion of the
business entertainment meal expenses is treated as paid under a nonaccountable plan, is
reported as wages or other compensation on Luis's Form W-2, and is subject to withholding
and payment of employment taxes.
Accountable Plans
The treatment of an employee's reimbursed expenses depends on whether the reimbursement or expense allowance comes within the accountable plan standards (see ¶6006.0321). In general, expenses reimbursed under an accountable plan are not required to be included in the employee's income, and a deduction of such expenses is not claimed on the employee's tax return. A reimbursement of expenses received under a nonaccountable plan must be included in the employee's gross income; if the employee can substantiate the expenses, they are deductible only as miscellaneous itemized deductions (see ¶14,417.1491 et seq.). Certain "statutory employees" claim their unreimbursed car and other business expenses as deductions from gross income (¶8474.01).
Accountable plan and nonaccountable plan defined.--
Reg. §1.62-2 provides that an arrangement between an employee and employer must meet the
requirements of business connection, substantiation and return of excess payments in order
to be considered a reimbursement or other expense arrangement for purposes of Code Sec.
62(a)(2)(A). Plans that meet these three requirements are considered to be accountable
plans, and the reimbursed expenses are generally deductible from gross income to arrive at
adjusted gross income. (But see, "Special rule for failure to return excess" at
.0326, below.) Those plans that do not meet all of the requirements are considered
nonaccountable plans, and expenses are subject to the two-percent floor imposed on certain
itemized deductions by Code Sec. 67. However, the determination of whether a plan is
accountable or nonaccountable is applied on
an employee-by-employee basis (Reg. §1.62-2(i)). Thus, one employee's failure to
adequately substantiate his or her expenses will cause an amount paid to the employee to
be treated as paid under a nonaccountable plan, but will not cause amounts paid to other
employees to be treated as paid under a nonaccountable plan. In addition, a payor may have
more than one arrangement in effect with respect to any given employee (see Reg.
§1.62-2(c)(1)).
Payments may be made to the employee from the employer, its agent, or a third party for which the employee performs a service as an employee of the employer. The arrangement may also include amounts charged directly or indirectly to the payor through credit card or other charge systems.
Reimbursement payments must be identified as separate from wage payments (Reg. §1.62-2(d)). Accordingly, in order for a payment to be considered made under a reimbursement or other expense allowance, an employer can make a separate payment to cover expenses paid or incurred by the employee. If the employer chooses to combine both wages and the reimbursement or other expense allowance into a single payment, the amount of the reimbursement or other expense allowance must be separately identified.
Details on the substantiation requirements appear at ¶14,417.14 et seq.-- CCH.
Reimbursed expenses--substantiation and reporting rules.--
There are separate rules for independent contractors and for employees who are reimbursed
for business expenses. In general, employees may meet the substantiation requirements by
using an accountable plan, while independent contractors do not have this option.
Independent contractors. Independent contractors may exclude from income expense reimbursements or advances received from clients or customers if the expenses are substantiated in accordance with Temp. Reg. §1.274-5T(c) (Temp. Reg. §1.274-5T(h)). Amounts not substantiated must be included in income.
Independent contractors must also provide an adequate accounting to clients or customers if the reimbursement or advance is for entertainment expenses (Temp. Reg. §1.274-5T(h)(3)). The adequate accounting required from an independent contractor must meet the adequate records or other sufficient evidence requirements of Temp. Reg. §1.274-5T(c)(1)-(c)(5). If the client or customer receives an adequate accounting relating to entertainment expenses from an independent contractor, the client must also substantiate the elements of the expense (Temp. Reg. §1.274-5T(h)(4)).
Self-employed individuals may compute their deduction for ordinary and necessary business meal and incidental expenses incurred for travel away from home using the substantiation method discussed at .1495, below. Using that method, a self-employed individual is deemed to satisfy the adequate records requirement.
Employees. Business expenses reimbursed under an "accountable plan" are excluded from an employee's income, are not required to be reported on the employee's Form W-2, and are exempt from income and employment tax withholding (Temporary Reg. §1.62-2T(c)(4)).
An accountable plan (explained in detail at ¶6006.0321) is a reimbursement or other expense allowance arrangement that meets the following three requirements:
(1) Business connection. The arrangement provides advances, allowances, or reimbursements of an employee's business expenses paid or incurred in the performance of services as an employee. If wages and the reimbursement are combined, the reimbursement amount must be specifically identified or made in a separate payment (Reg. §1.62-2(d)).
(2) Substantiation. The employee must submit information to the payor
sufficient to satisfy the requirements of Temp. Reg. §1.274-5T to
substantiate expenses for travel, entertainment, business gifts, or use of listed
property. This means that the employee must make an "adequate
accounting" to his employer for such expenses (Temp. Reg. §1.274-5T(f)(4)). For
other reimbursed expenses, information must be submitted that is sufficient to enable the
payor to identify the specific nature of each expense and to conclude that the expense is
an employee business expense (Reg. §1.62-2(e)).
(3) Return of amounts exceeding expenses. The arrangement must require that an employee return to the payor within a reasonable time the amount of the reimbursement or allowance that exceeds substantiated expenses. If excess amounts are not returned within a reasonable time, the excess amounts are treated as paid under a nonaccountable plan (Reg. §1.62-2(c)(2)(ii)). For expenses reimbursed pursuant to an IRS-approved per diem allowance (see .1492--.1496, below), this rule may be satisfied if the arrangement requires the return of the portion of an allowance that relates to days or miles of travel not substantiated, provided that the allowance was reasonably calculated not to exceed anticipated expenses.
Adequate accounting to the employer. In order to exclude the reimbursement
of expenses for travel, entertainment, gifts, and use of listed property from income, an
employee must provide an adequate accounting to his employer. An adequate accounting, for
purposes of the substantiation requirement, means submitting to the employer an adequate
record of expenses (.124, above). Accordingly, the submission to the employer must
substantiate each element of the expense, including amount, time, place, business purpose,
business relationship (in the case of gifts and entertainment expenses), and description
(in the case of a gift) of the expense. A record of expenses charged to the employer
directly or indirectly (e.g., through the use of credit cards) should be included. The
employee should also account for all expense reimbursements received from his employer
during the tax year (Temp. Reg. §1.274-5T(f)(4)). An adequate record may be an account
book, diary, log, statement of expense, trip sheet or similar record maintained by the
employee in which the expense is recorded at or near the time it is made. In addition,
documentary evidence, such as paid bills or receipts, generally is required for all
lodging expenditures and other expenditures that exceed $25 (Temp. Reg.
§1.274-5T(c)(2)). Employees, unlike other taxpayers, are not permitted to substantiate
expenses with other sufficient evidence consisting of their own statement and
corroborative evidence (Temp. Reg. §1.274-5T(f)(4)). However, under exceptional
circumstances or if records are lost due to circumstances beyond the control of the
taxpayer, an employer may accept an employee's substantiation if it meets the requirements
of Temp. Reg. §1.274-5T(c)(4) or (5) (Temp. Reg. §1.274-5T(f)(4)).
As an alternative, the adequate accounting requirement can be satisfied by using per diem allowances for certain lodging, meals, and incidental expenses (.1492, below). Similarly, automobile expenses can be accounted for by using a mileage allowance up to the standard mileage rate (.1496, below).
Nonaccountable plans. Advances, allowances, or reimbursements under a plan
not meeting one or all of the prerequisites of an accountable plan are included in an
employee's gross income, are reported on his Form W-2, and are subject to income and
employment tax withholding (Reg. §1.62-2(c)(5)). An employee may claim itemized
deductions for expenses attributable to amounts received under a nonaccountable plan. To
do so, he must substantiate the full amount of his expenses, including any that are
treated as reimbursed under an accountable plan.
The deduction is a miscellaneous itemized deduction subject to the 2% floor of Code Sec. 67 (¶6064.01) and the 50% limitation on meal and entertainment expenses of Code Sec. 274(n). Employee business expenses must be reported on Form 2106.
Expenses exceeding reimbursed amounts. An employee whose expenses exceed the amount reimbursed under an accountable plan may deduct the additional expenses as miscellaneous itemized deductions. Travel and entertainment expenses, business gifts, and the use of listed property are subject to the substantiation requirements of Code Sec. 274(d). Per diem allowances may be used to substantiate the amount of excess meals and incidental expenses while away from home (see .1495, below), and a standard mileage rate may be used to prove the amount of excess automobile expenses (see .1496, below).
Reimbursed meal expenses could be treated as moving expenses before 1994. Prior to 1994, if an employer reimbursed an employee's meal expenses and the amount was includible in the employee's income under Code Sec. 82 as a reimbursed moving expense, then the percentage limitation (then 80%) on deductible meal expenses applied at the employee level (former Code Sec. 274(n)(2)(E)). The employer could deduct the entire reimbursement as compensation paid. However, the employer was not required to withhold on the reimbursement if it was reasonable to believe that the employee would have been entitled to a moving expense deduction under Code Sec. 217 (as computed without regard to the percentage limitation). Meal expenses may not be deducted as moving expenses after 1993 (see ¶12,623.095).