Posted on May 21, 2021 by Carol Hill
This Client Alert is a courtesy of the law firm of Lasher Holzapfel Sperry & Ebberson PLLC to inform you of a potential tax trap that may affect your company and your employees if your Company reimburses employees for business related expenses. Please review the summary below as the tax consequences can be substantial.
- Historically before the Tax Cuts and Jobs Act (“TCJA”), employees with unreimbursed job related expenses could deduct these expenses on their individual tax returns. After the TCJA, employees are unable to deduct any unreimbursed job related expenses so many companies are now reimbursing employees for these business related expenses. In addition, some companies pay advances to their employees to cover future business related expenses.
- If certain rules are not followed regarding these reimbursements or advances, then the IRS takes the position that these reimbursements or advances are actually wages to the employee. The result is a double tax on the reimbursements since (i) the company must pay the employer portion of any FICA taxes on these reimbursements and (ii) the employee must pay its share of FICA taxes on these reimbursements and federal income taxes on the reimbursed amounts.
- This is obviously a very bad result that can be easily be prevented. The safest and easiest way to ensure the best tax result for employee advances and reimbursements for business related expenses is to have the company adopt an Accountable Plan for Business Expense Reimbursement (an “Accountable Plan”). When a company uses an Accountable Plan, reimbursements and advances for business related expenses are not treated as wages and no additional taxes are imposed. The company is then also able to deduct the reimbursements as if the company had incurred the initial expense.
- The Accountable Plan is a simple and short document, which the company and employee must follow in order for the Accountable Plan to be valid. For further detailed information on what provisions must be included in an Accountable Plan, please see our blog post at the following link, Think Twice Before Reimbursing Your Employee. For example, if the Accountable Plan requires substantiation of expenses within 60 days, the company and its employees should make every effort to comply with this time requirement including educating their employees of the Accountable Plan requirements.
- If your Company reimburses its employees for business expenses, you should ensure that your Company has an Accountable Employee Business Expense Reimbursement Plan and that it meets the requirements of a qualified accountable plan. If your Company does not have such a plan, please feel free to contact our Corporate Department. Upon your request, we will put a standard Accountable Plan for Business Expense Reimbursement in place for your Company for a flat $350 fee (which includes an adopting Consent and the Plan itself), but please note that any special services or time spent would be in addition to that fee.
- You should also discuss this matter with your Company CPA.
The business attorneys at Lasher Holzapfel Sperry & Ebberson are here to help. Please reach out with any questions.