The Importance of Expense Reimbursements at Year-End

November 2019 | Article

Expense reimbursements are a critical part of your year-end, and all year-round, planning. A sound expense reimbursement plan not only helps your business keep proper documentation, it also helps you remain in compliance.

What is Expense Reimbursement?
When we talk about expense reimbursement, we’re referring to paying your employees back for what they spent (of their own money) on business-related expenses. The IRS defines a business-related expense as any ordinary and necessary costs for carrying out your trade or business.

Your expense reimbursement plan should clearly outline the specifics on what you reimburse to your employees. In addition, it should be compliant with the IRS and Department of Labor.

Steps to Creating a Strong Expense Reimbursement Plan
An Accountable Expense Reimbursement Plan

The IRS states the following conditions must be met for your expense reimbursement to comply:

  • It must be a business reason.There must be a business reason for the expense. In other words, you can’t just go out for drinks and submit it for reimbursement. It must have a connection with the services your employee is performing.
  • It needs to be validated.Your employee should be able to supply receipts or invoices that document the amount and nature of the expense being submitted for reimbursement.
  • No excess.Your employees need to return any amounts paid more than the validated expenses.

When these three conditions are met, it’s referred to as an accountable plan. This is important to know, because if you have a non-accountable plan, the amounts reimbursed to your employees could be considered income and thus need to be included on the Form W-2. An accountable plan, on the other hand, allows reimbursements to not be considered taxable.

What else belongs on the W-2?

The Five “Ws,” and a Few Other Items
Meal Reimbursements
One of the key expenses often paid through reimbursement are meals. Employees can use per diem allowances, which are allowances for lodging, meals and incidental expenses. The General Services Administration sets per diem rates within the lower 48 states.

If you’re not using a per diem allowance, the IRS has specific requirements to substantiate actual meal receipts. It’s known as the five “Ws”:

  • Who was there?
  • Why is the meal considered official business?
  • Where did the meal occur?
  • What was the cost of the meal?
  • When did the meal occur?

Learn more about deductibility of meal and entertainment expenses:

Automobile Expenses
The IRS also has rules when it comes to automobile expense reimbursements. The policy related to automobile expense reimbursements must describe how your employees use a vehicle for business expenses. This applies to both an automobile owned/leased by your company as well as mileage reimbursement and personal use.

Have employees who are using company automobiles for personal use?

Ensuring Your Expense Reimbursement Plan is DOL Compliant
The Department of Labor also has rules when it comes to expense reimbursements. These rules include:

  • The five “Ws”.The DOL adheres to the 5 Ws when documenting all expenses to be reimbursed. Further, they require your employees to provide the original receipt and written description. If the receipt is lost, your policy must state you require a signed statement from the employee regarding the lost receipt.
  • Substantiation for all.The IRS has an exception that allows you to not keep records for any expense (excluding lodging) less than $75. This is not true with the DOL. The DOL states that all reimbursed expenses must have the proper records.
  • For meal expenses, the DOL requires itemized receipts.In other words, the credit card slip won’t work. You need the actual ticket that details what each person ordered, as well as the credit card slip indicating how much tip was left.
  • Automobile rules.When it comes to organization-owned or leased vehicles, employees must furnish date of travel, number of miles driven, whether it was for personal or business and the odometer reading. If your policy also includes reimbursement for personal vehicles, the DOL states you have to have at least one record that includes date of travel, locations traveled to and from, number of miles and business purpose.

Why Expense Reimbursement Matters for Your Business
As you plan for year-end, make sure your policy for expense reimbursements is compliant. By setting these rules in place, you’ll ensure your employees not only have the information they need as they travel for work but also that your business follows the IRS and DOL regulations.

Year-End Planning

Stay current on your favorite topics

SUBSCRIBE

Learn More

See what more we can bring to organizations just like yours.

Ag Producers Construction & Real Estate Dealerships Manufacturing & Distribution

Take a deeper dive into this Insight’s subject matter.

Business Outsourcing & Strategy Tax

Make Your Business Dreams a Reality.
You’ve built a business and made your dream a reality now it’s time to explore how better to organize and/or outsource your accounting function.

Find A Location