A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. What are some examples of ordinary and necessary expenses that would require employer reimbursement? The most common are work-related supplies, travel, meals, and entertainment.
Supplies that an employee purchases for business purposes can be reimbursed at cost, provided that they are reimbursed pursuant to an accountable plan.
The cost of work-related travel is generally a reimbursable expense. The cost of work-related travel, including transportation, lodging, meals, and entertainment that meet the criteria outlined in IRS Publication , Travel, Entertainment, Gift, and Car Expenses , are generally reimbursable expenses.
Many employers will reimburse an employee who uses their personal vehicle for business at a standard mileage rate. The standard mileage rate is set by the IRS each year. The standard federal mileage rate for business in is 56 cents per mile. Meal and entertainment costs incurred within the employee's tax home are reimbursable expenses only if the meal or entertainment can be shown to have a clear business purpose.
Building an expense plan will save employers time, confusion, and stress. If the employer does not have an accountable plan, then any reimbursements, even those that are ordinary and necessary, are taxable income. Consider drafting a plan; doing so will likely save everyone time, confusion and stress.
Even with an accountable plan, there are some things to look out for. For instance, if the employer has an accountable plan, but the employee fails to properly substantiate the expenses within a reasonable time, or the employee fails to return excess advance payments, then any reimbursements could become taxable income.
In addition, if any expenses are paid in excess of IRS limitations, then the excess is taxable income. For example, if an employer reimburses an employee for mileage at more than the standard mileage rate, then the excess is taxable income.
Employees should only have to pay income taxes on the wages they earn and certain taxable fringe benefits. Expenses incurred by employees in the course of business should be costs incurred by the employer, not by its employees. However, a key to maintaining any accountable plan is to properly and timely substantiate expenses. Justworks keeps you informed on employment regulations while taking care of your employer payroll tax filings. Learn more about our compliance support.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.
Justworks helps businesses with their benefits, payroll, and everything else they need to take care of their team. There is no IRS form necessary to adopt an accountable plan. Each employee must furnish adequate substantiation of all reimbursed expenses. Evidence of expenditures generally includes receipts, canceled checks, or paid bills. Certain types of expenditures, such as travel, meals, and lodging while away from home, require specific documentation see IRS Topic 11, Business Travel Expenses.
An ordinary expense is one that is common and accepted in the industry; a necessary expense is one that is appropriate and helpful to a business. It is important to ensure that the accountable plan is properly structured, as the IRS has been diligent in challenging arrangements that it suspects are merely attempts to conceal compensation and, thereby, avoid taxation.
If the IRS determines a plan is nonaccountable, all reimbursements will be transformed into taxable wages and will be subject to income tax for the employee, as well as to employment tax for the employee and employer. Any reimbursement plan that does not satisfy the requirements of an accountable plan is a nonaccountable plan. For example, employers who give employees a set amount for monthly business expenses and do not request any proof of business-related expenses nor request a refund for unspent funds are operating nonaccountable plans.
It is possible to have an accountable plan for some items and a nonaccountable plan for others, if this best suits the situation, but in such cases employers should clearly communicate to employees how this will affect their taxable wages. Many employees may be paying outof-pocket expenses that are not being reimbursed with either an accountable or a nonaccountable plan.
Now that employees are no longer able to take a tax deduction for these expenses under the TCJA, they may either stop paying for these items if optional or become more resentful that they are not being reimbursed. Employers should discuss with their employees just which business-related expenses the employees may have paid in the course of doing their jobs but not requested or been offered reimbursement for.
Some employers may be able to make an educated guess, but not a true accounting. Examples of pre unreimbursed business expenses claimed as itemized deductions include the following:. Employees with substantial unreimbursed work-related expenses, or who are partially or fully reimbursed under a nonaccountable plan, will be negatively affected by the TCJA. CPAs should understand that employees with substantial unreimbursed work-related expenses, or who are partially or fully reimbursed under a nonaccountable plan, will be negatively affected by the TCJA, despite the increase in the standard deduction, even as employers will be positively affected.
Employees will most likely fully recognize the negative aspects of losing important deductions as the tax filing season progresses. It would not have been necessarily incurred by any holder of the office of sales manager. Tax would therefore be payable on the reimbursement. Different rules apply from 6 April The new system gives a tax exemption for expenses which would be tax-deductible under normal rules. You can find the details here:. Up to 5 April , many employers reimbursed work related expenses at rates agreed with HM Revenue and Customs to produce no tax liability.
Where a specific agreement existed between HMRC and the employer this was called a dispensation. These include provisions of bicycles, parking, and nursery provision for example.
Specific conditions apply so care is needed.
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