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Business Planning 

Guidelines for Expense Reimbursements and Deductions 

Most executives are aware they can deduct certain expenses (e.g., travel, lodging, entertainment) incurred while performing services for their employer. Typically, the undertakings that involve employee business expenses are: sales activities; temporary work assignments in different locations; work-related conferences; and job-related education. In many cases, employers will reimburse employees for some (or all) expenses under either an accountable or non-accountable plan.

With an accountable plan, reimbursements are excluded from your taxable income and do not appear on your Form W-2. For a reimbursement plan to qualify as accountable, three requirements must be satisfied: 1) there must be a bona fide business connection for the incurred expenses; 2) the employee must substantiate employment-related expenses to the employer; and 3) any unsubstantiated advance payments (excess reimbursements) must be returned to the employer within a reasonable period of time.

If any of these three requirements are not met, reimbursements are considered to be under a non-accountable plan and are included in your taxable income on your Form W-2. You can claim expenses reimbursed under a non-accountable plan (and any unreimbursed expenses) as a miscellaneous itemized deduction on your income tax return.

What's the Difference? 

Does it really matter what type of plan your employer has set up? In a word, yes. As an employee, being reimbursed under an accountable plan may be more desirable for several reasons.

First, with an accountable plan, reimbursements would not be included in your taxable income. If all of your expenses were reimbursed, this would simplify your tax filing in that neither the expenses nor the reimbursements need be accounted for on your tax return.

Second, if you were covered under a non-accountable plan, you would have to account for the expenses on your tax return in order to offset the reimbursements included in taxable income. However, you would lose part of the benefit of the deduction because miscellaneous itemized deductions (which include employee business expenses) are limited by the 2% of adjusted gross income (AGI) rule. In effect, you would lose miscellaneous deductions equal to 2% of your adjusted gross income.

Example: You have $1,500 unreimbursed employee business expenses and your AGI is $50,000. Since 2% of $50,000 (AGI) is $1,000, you would lose that amount and only be able to deduct $500.

In addition, if you take the standard deduction rather than itemizing, you would lose all the potential miscellaneous deductions.

Whether covered under an accountable or non-accountable plan, good recordkeeping is essential. Keeping a daily journal of your business activities involving out-of-pocket expenses will provide the documentation you need for adequate accounting to your employer and for substantiating employee business expenses on your tax return.

Copyright © 2003 Liberty Publishing, Inc. All rights reserved.


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