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Employee Business Expenses

by Tim Goetz

I recently returned from a business trip, which gave me the idea to write a blog about what’s needed for a company expense reimbursement policy.

To start, a good expense reimbursement policy will entail the following:

  1. It clearly states all reimbursable expenses must be work related.
  2. It requires substantiation/receipts of work-related expenses.
  3. Receipts must be submitted within X days of the expense. (The IRS stipulates a “reasonable” amount of time.)
  4. Any employer advance in excess of business expenses is returned, or the excess amount is reported on the employee’s W-2.
  5. An expense report is signed by a supervisor, and it also details the reasons for each claimed expense.

Make sure you know the expenses that unequivocally cannot be deducted, according to the IRS (not a complete list). For further understanding, the IRS site also discusses employee business expenses and deductions in greater detail.

Just because an employee incurred an expense during the course of business travel doesn’t necessarily mean the expense is automatically a business expense. For example, let’s say an employee, Joe, goes to Los Angeles for a business trip and arrives at 1:00pm Monday. Then Joe goes to Disneyland because there are no business meetings until Tuesday. In this case, the cost of the Disneyland ticket is not a reimbursable business expense. If your nonprofit decides to reimburse the employee, that may be considered taxable income to the employee. The unrelated reimbursed expense may also have negative tax consequences for the organization, and if it’s excessive, that may jeopardize the nonprofit’s 501(c)(3) status.

Reimbursement Methods

There are usually two different methods used to reimburse employees for business expenses:

  • Direct reimbursement plan/accountable plan (not on W-2)
  • Federal per diem rates (report on Box 12 of W-2 if reimbursement rate exceeds Federal Rate, and insert Publication 1542)

For information on travel, entertainment, gifts, car expenses, and mileage rates, refer to IRS Publication 463.

Good luck, and remember this blog is just a helpful resource and is not meant to be a substitute for professional services. Always consult a CPA or trusted professional if you seek tax or accounting advice.

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