Substantiating employee expense account and expense reimbursement arrangements.
Q- 1. Do you have an expense account or expense reimbursement arrangement with your employer?
A- A. You get a better tax result on your own income tax return if your expense account or reimbursement arrangement qualifies as an “accountable” plan. (See B, below) Under such a plan, you do not include the payments made to you in income when preparing your return, thereby avoiding income and social security taxes on the payments. If your plan isn’t an accountable one, you must include the payments in income on your return and can deduct your actual expenses only as part of your miscellaneous itemized deductions, subject to the 50% limit on meal and entertainment expenses and the 2%-of-adjusted-gross-income floor on miscellaneous itemized deductions. A- B. These 2% itemized deductions are eliminated in 2018. Your expense account or reimbursement agreement is accountable if it
(1) requires you to substantiate your business expenses to your employer within a reasonable period,
(2) requires you to return to your employer within a reasonable period payments made to you in excess of your substantiated expenses, and
(3) requires you to show the business connection between any advances you receive and the expected business expense that the payment will cover3
A- C. If no reimbursement plan is provided,.
Q- 2. Does your employer require you to substantiate your expenses?
A- A. In order to claim a deduction for
(1) business travel expenses while away from home, including meals and lodging,
(2) business entertainment, amusement, or recreation, or expenses in connection with a facility used in connection with these types of activity,
(3) business gifts, and
(4) expenses relating to a passenger automobile used for business travel, you must provide substantiation to your employer for these outlays
A- B. For the deductible items listed in A above, the substantiation must support
(1) the amount of the expense,
(2) the time and place of the travel, entertainment, amusement, etc.,
(3) date and description of the gift,
(4) the business purpose of the expense, and
(5) the business relationship to you of the persons you entertain or give a gift
Q- 3. How do you substantiate your expenses?
A- A. The accountable plan rules require you to submit to your employer information that substantiates each element of the expense described at 2B, above. This can be in the form of a diary, account book, statement of expenses or similar record. The records must be made at or near the time of the expense. The records should be backed up by documentary evidence, such as receipts or paid bills for away-from-home lodging expenses and any other separate expenditure of $75 or more (except for transportation expenses for which such evidence isn’t readily available
A- B. The record keeping requirements described at A, above, can be quite burdensome. If you and your employer agree, your expense account can be arranged so that certain of your expenses will be “deemed” substantiated for purposes of the tax law requirements without the detailed record keeping described above. But you can’t take advantage of the “deemed” substantiation rules if you are an over-10% stockholder in your employer corporation or are related to your employer (brother, sister, spouse, parents, grandparents, children, or grandchildren). Instead, you must substantiate your expenses under the regular rule.
A- C. You can reduce your record keeping for business travel in your automobile if you and your employer agree to your being paid the IRS optional standard business travel mileage rate as a mileage allowance instead of actual automobile expenses. If you substantiate to your employer the time, place, and business purpose of your transportation expenses, you will meet the IRS substantiation requirements for an accountable plan up to the amount of the mileage rate times the number of business transportation miles. The employer’s reimbursement to you of this mileage allowance is excludible from your income in preparing your income tax return
A- D. As an alternative to using the IRS standard mileage rate as substantiation (see C above), you and your employer may agree on your being reimbursed for expenses of business travel in your automobile through a so-called fixed and variable rate (FAVR) allowance. This is an IRS-approved substantiation method for an accountable plan and may give you a better tax result than the mileage allowance method in C, above. However, a FAVR allowance is permitted only if your employer has at least 5 employees covered by such an allowance, at least half of whom are not management employees.
A- E. You can also reduce your record keeping for away-from-home lodging, meal and incidental expenses if you and your employer agree on your being paid a per diem allowance instead of being reimbursed for your actual expenses. An IRS-approved per diem allowance (see F below) constitutes substantiation for an accountable plan, thus permitting the allowance to be excluded from the employee’s gross income.
A- F. A per diem allowance arrangement provides for payment of an employee’s current or anticipated away-from-home business expenses (lodging, meals, and incidentals) in an amount reasonably calculated not to exceed the actual outlays. To qualify as substantiated, the allowance must not exceed the federal per diem rate for the “locality of travel.” The federal per diem rate is the sum of the federal lodging expense rate plus the federal meal and incidental expense (M & IE) rate for the locality of travel. An optional high-low method can be used to determine per diem for travel within the U.S., without the need to keep track of per diem rates for each locality.
Q- 4. Do your business expenses exceed the amount of your expense or reimbursement account paid by your employer?
A- A. While the travel expenses reimbursed by the employer are excludible from the employee’s income under the rules discussed above, the employee can also deduct on his tax return his business expenses that exceed the reimbursement if he accounts for the excess to his employer and substantiates the expenses by one of the methods described above.
A- B. The substantiated excess travel expenses under A, above, are deductible by the employee as an itemized deduction. This deduction is subject to a 50% limitation on any includible meal and entertainment expenses and that adjusted amount is subject to the 2%-of-adjusted-gross-income floor on miscellaneous itemized deductions.