IRS Logo
Print - Click this link to Print this page

Avoiding Problems - Entertainment

Business Expenses Reimbursed By Employer

A reimbursement or allowance arrangement is a system by which you substantiate and pay the advances, reimbursements, and charges for your employees' business expenses. How you report a reimbursement or allowance amount depends on whether you have an accountable or a nonaccountable plan.

These rules apply to all ordinary and necessary employee business expenses that would otherwise qualify for a deduction by the employee.

Accountable Plan

To be an accountable plan, your reimbursement or allowance arrangement must require your employees to meet all three of the following rules:

  • They must have paid or incurred deductible expenses while performing services as your employees
  • They must adequately account to you for these expenses within a reasonable period of time
  • They must return any amounts in excess of expenses within a reasonable period of time

Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and payment of social security, Medicare, and Federal unemployment (FUTA) taxes.

Nonaccountable Plan

If the expenses covered by the arrangement above are not substantiated, or amounts in excess of expenses are not returned within a reasonable period of time, the amount is treated as paid under a nonaccountable plan.

This amount is subject to income tax withholding and payment of social security, Medicare, and FUTA taxes for the first payroll period following the end of the reasonable period.

Accelerated Depreciation vs. Income Forecast Method

The Internal Revenue Code and Case law requires the use of income forecast or straight line method of depreciation. Refer to the section on Intangible Property in Publication 946 (2007), How To Depreciate Property, for more information

Recordkeeping
Unless you are a professional bookkeeper, you probably don't like to spend valuable business time keeping records. But keeping good records can actually help you save money.

Understanding Your IRS Notice
We realize that receiving a notice from the IRS can be unnerving, but if you follow these simple steps, the process to resolving the discrepancy should be straightforward.

Rate the Small Business and Self-Employed Website

Page Last Reviewed or Updated: 11-Jul-2014