Volume 7 Issue 2007

How a company handles business expenses incurred by employees, such as travel and entertainment expenses, makes a difference at tax time. Assuming the company, not the employee, will ultimately be paying the bills, there are two basic choices:

An Accountable Plan

With this method, employees substantiate their expenses to the company and the company pays the expenses. Because expenses are reimbursed dollar for dollar, employees do not have to report any income as a result of the arrangement and the employer owes no payroll taxes on the amounts. The company deducts the expenses (subject to the usual 50% limit on meal and entertainment expenses).

Within these broad parameters, a business has some flexibility as to how its accountable plan is set up. For example, if requiring employees to pay out-of-pocket and then request reimbursement will present problems, the business might decide to advance money to employees for their expenses. However, for the plan to be considered an accountable plan, employees would have to return any excess amounts advanced to them. Other possibilities include having employees charge their expenses to a company charge card or having bills sent directly to the business.

A Nonaccountable Plan

This method simplifies the company's recordkeeping because employees are not required to submit receipts or other documentation for their expenses. The company simply gives employees an allowance to cover their expenses, and employees keep any amounts they don't spend. Expense allowances are included in employees' wages, and all the usual payroll taxes apply. The company deducts the wages and taxes. Employees may deduct their business-related expenses, assuming they itemize their tax deductions (limits apply), and have the appropriate records.

If you'd like to discuss the way your company handles employee business expenses, please let us know.