Importance of creating effective expense reimbursement plan
Nov. 29, 2022
This paid piece is sponsored by Eide Bailly LLP.
A version of this article appeared on eidebailly.com.
Expense reimbursements are an important part of year-end and year-round planning.
What is expense reimbursement?
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 outline clearly the specifics on what types of expenses will be reimbursed, and the plan also should be in compliance with governmental regulations.
Steps to creating an expense reimbursement plan
An accountable expense reimbursement plan, or accountable plan, generally allows for tax-free reimbursement. An accountable plan has these three elements:
- Business purpose: There must be a business reason for the expense.
- Validation: An employee should be able to supply receipts or invoices supporting and documenting the amount and nature of the expense being submitted for reimbursement.
- No excess: Employees must return any amounts paid in excess of the validated expenses.
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 five “W’s” and a few other items
Meal expenses
Employees can use per-diem allowances for certain meal expenses. The General Services Administration sets per-diem rates within the Lower 48 states.
If actual expenses are used instead of the per-diem rates, the IRS has specific requirements, known as the five W’s:
- Who was there?
- Why is the meal considered business-related?
- Where did the meal occur?
- What was the cost of the meal?
- When did the meal occur?
The IRS recently issued favorable guidance related to the temporary 100 percent 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 percent deduction. This special rule is effective for expenses paid or incurred beginning Jan. 1, 2021, through Dec. 31, 2022.
Generally, business deductions for food and beverage expenses are limited to 50 percent of the amount that would otherwise be allowable, subject to certain exceptions. However, a provision in the Consolidated Appropriations Act of 2021 permits a full deduction for business-related food or beverage expenses if the food and beverages are:
- Paid or incurred during calendar years 2021 and 2022.
- Provided by a restaurant.
Learn more about deductibility of meal and entertainment expenses and how recent legislation removes the usual 50 percent limit on deducting business meals provided by restaurants in 2021 and 2022 here.
Automobile expenses
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 or leased by your company, as well as mileage reimbursement and personal use.
Have employees who are using company automobiles for personal use? Read more about rules related to personal use of company automobiles here.
Why expense reimbursement matters for your business
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 not only have the information they need as they travel for work but also that your business follows the IRS and Department of Labor regulations when it comes to the taxability of reimbursement of expenses to employees.
A successful year-end starts with efficient systems and processes. When you have that, year-end just becomes another day.
Not sure where to start? Eide Bailly’s technology professionals can help you develop an actionable road map to a more efficient year-end. Learn more here.
