Preparing for the New Year: Expense Reimbursements

January 2019 | Article

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:

  • It must be a business reason. There has to 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.

The Five “Ws,” and a Few Other Items
Meal Reimbursements
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”:

  • 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?

Want to learn more about how meals are affected by tax reform? Check out our meals and entertainment guide.

Automobile Expenses
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 Five “Ws”. The DOL also adheres to the 5 Ws when documenting all expenses to be reimbursed. Further, they also require that your employees provide the original receipt and written description. If the receipt is lost, your policy has to 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 have to keep records for any expense (excluding lodging) that is less than $75. This is not true with the DOL. The DOL states that all reimbursed expenses have to 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.

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.

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