20.31 Tax Treatment of Reimbursements

Compliance rules are imposed on employees and employers for reporting reimbursed travel and entertainment expenses in order to prevent reimbursement arrangements from being used to avoid the 2% of adjusted gross income (AGI) floor for employee miscellaneous expenses. Plans that allow reimbursements that do not comply with the IRS rules are called non-accountable plans. All reimbursements under a non-accountable plan are reported as salary or wage income on Form W-2. You then deduct your expenses as miscellaneous deductions subject to the 2% AGI floor (20.35).

If a plan meets the IRS rules, the plan is called an accountable plan and reimbursements made by the plan are not reported on Form W-2 as taxable wages. You also do not have to deduct expenses, assuming the reimbursement equals your expenses. In other words, there is a bookkeeping “wash” in which the full amount of expenses offsets the reimbursement without being reduced by the 2% AGI floor, and in the case of meal and entertainment costs, by the 50% reduction. Even though the employer may only deduct 50% of qualifying meal and entertainment expenses, you are not taxed on any part of a reimbursement of such costs if the accountable plan rules are met.

To qualify a plan as accountable, your employer must see to it that you submit adequate proof of your expenditures, and that you return any excess advances (20.32). To reduce record-keeping for actual costs, the company may reimburse you according to certain fixed per diem allowance rates (20.33). Your company must also determine how much of the advance or reimbursement, if any, is to be reported on your Form W-2.

Court Decision

Ask for Reimbursement

If you are entitled to reimbursement from your employer, make sure you ask for reimbursement. Failure to be reimbursed may prevent you from deducting your out-of-pocket expenses. A supervisor whose responsibility was to maintain good relations with his district and store managers entertained them and their families and also distributed gifts among them. His cost was $2,500, for which he could have been reimbursed by his company, but he made no claim. Consequently, the Tax Court disallowed the cost as a deduction on his return. The expense was the company’s; any goodwill he created benefitted it. But because he failed to seek reimbursement, he was not allowed to convert company expenses into his own.

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Reimbursements of club dues or spousal travel costs.

If you are reimbursed for nondeductible club dues (20.23) or nondeductible travel costs of a spouse or other person (20.14), the reimbursement may be treated by your employer as taxable wages. If it is, you are not allowed an offsetting deduction. If the reimbursement is not treated as taxable wages by your employer, and you substantiate a business purpose for the club dues or for a travel companion’s presence, the reimbursement is considered to be a tax-free working condition fringe benefit (3.9).