As we enter the new year, it’s important to ensure you’re entering 2019 on the right foot. There are several things to consider to keep your business in compliance. One of these is your expense reimbursement policy.
The IRS defines business expenses as ordinary and necessary costs for carrying out your trade or business. 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.
Not only should your business have an expense reimbursement policy, but that policy must be compliant with the IRS and Department of Labor.
An Accountable Plan
The IRS states the following conditions must be met for your expense reimbursement to comply:
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.
The Five “Ws,” and a Few Other Items
One of the key expenses often paid through reimbursement are meals. Yes, the IRS has specific rules about this.
If you’re not using a per diem allowance, the IRS has specific requirements to substantiate your actual meal receipts. It’s known as the five “Ws”:
Want to learn more about how meals are affected by tax reform? Check out our meals and entertainment guide.
The IRS also has rules when it comes to automobile expense reimbursements. Again, we go back to the rule of substantiation. 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? Check out our personal use of auto guide.
The Department of Labor
The Department of Labor also has rules when it comes to expense reimbursements. These rules include:
The Moral of the Story
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.
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.