Expense reimbursements are an important part of year-end and year-round planning.
Expense reimbursement refers to reimbursing employees for certain business-related expenses incurred by the employees. The IRS generally defines business-related expenses as ordinary and necessary costs related to carrying on a trade or business.
An expense reimbursement plan should clearly outline the specifics on what types of expenses will be reimbursed and the plan should also be in compliance with governmental regulations.
If instead a plan is not accountable (or otherwise does not satisfy the various governmental regulatory requirements) the amounts paid to employees could be considered income and thus included on Form W-2.
Want to know more about Form W-2?
The IRS recently issued favorable guidance related to the temporary 100% deduction for business-related food and beverages provided by a restaurant in 2021 and 2022. Notice 2021-63 clarifies that the meal portion of a per diem rate or allowance can be treated as attributable to food or beverages provided by a restaurant for purposes of applying the 100% deduction. This special rule is effective for expenses paid or incurred beginning January 1, 2021, through December 31, 2022.
Generally, business deductions for food and beverage expenses are limited to 50% of the amount that would otherwise be allowable (subject to certain exceptions). However, a provision in the Consolidated Appropriations Act, 2021, permits a full deduction for business-related food or beverage expenses if the food and beverages are:
This temporary expansion of the deduction for food and beverages is intended to help the restaurant industry recover from the effects of the COVID-19 pandemic by encouraging businesses to patronize restaurants for business meals. This expanded deduction does not extend to entertainment expenses.
Earlier this year, the IRS provided guidance on the definition of “provided by a restaurant” but didn’t address how the full deduction might apply for the meals portion of a per diem. Many taxpayers have questioned how these per diem amounts should be substantiated in order to qualify for the 100% deduction. With this latest notice, taxpayers that properly apply the per diem rules may treat the meals portion of a per diem rate or allowance paid or incurred in 2021 or 2022 as “provided by a restaurant.”
This is welcome guidance that may affect how businesses capture and track business-related meal costs in order to support a full deduction.
Learn more about deductibility of meal and entertainment expenses and how recent legislation removes the usual 50% limit on deducting business meals provided by restaurants in 2021 and 2022.
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 on company time. 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?
The Department of Labor also has rules when it comes to expense reimbursements. These rules include:
As you plan for year-end, make sure your policy for employee reimbursement is compliant. By setting these rules in place, you’ll ensure your employees will not only have the information they need as they travel for work but also that your business follows the IRS and DOL regulations when it comes to the taxability of reimbursement of expenses to employees.
This article is provided for general informational purposes only. It is not legal, accounting or other professional advice, as it does not address any individual facts, circumstances or concerns. Before making personal or business related decisions, please consult with appropriate legal, accounting or other qualified professionals.