Facts: Taxpayers will be reimbursed by the corporation for all out of pocket expenses incurred including transportation, and lodging expenses. However, taxpayers will not be reimbursed for costs incurred in the operation and maintenance of employee home offices. Issues: 1. What procedures must the corporation take in developing and carrying out any type of accountable plan 2.
What should employees be aware of regarding tax treatment of reimbursements and unreimbursed employee expenses References: Sec. 62 (a) (2) Employee expenses reimbursed under an accountable plan are not reported by the employee at all. In effect, these expenses are treated as deductions for agi. Reg. 1. 162-17 (b) (4) An accountable plan requires that the employee adequately account for all expenses through return of receipt and records to the employer, and that the Sec.
274 (d) employee return all excess reimbursements. No deduction will be allowed for any employee expense unless properly substantiated by adequate records, which include the expense amount, the time and place of travel, the business purpose of the expense, and the business relation to the taxpayer. Reg. 1. 162-2 T (e) (3) Unreimbursed employee expenses are reported as miscellaneous itemized deductions. Conclusion: It would be beneficial for the employee and wise for the corporation to pursue an accountable plan, for, pursuant to sec.
62 (a) (2), the mechanics of an accountable plan allows employees to not report any income nor any expense, therefore avoiding any deduction limitations that would occur if the taxpayer was forced to itemize the given deduction, as would occur under a non accountable plan However, an accountable plan requires thorough substantiation to comply with sec. 274 (d). If Robert and Elizabeth wish to be reimbursed for their employee expenses, they must submit records and receipts of all costs which include the amount of the expense the time and place of travel, the business purpose of the expense, and the business relation to the taxpayer. Failure to substantiate denies both the reimbursement to the employee and the deduction by the employer. There are a few things that the employee must remember for tax purposes regarding an accountable plan.
First, employees must return all excess reimbursement or face a gross income inclusion. Next, pursuant to reg. 1. 162-2 T (e) (3), employees may deduct unreimbursed employee expenses as miscellaneous itemized deductions only, which are subject to 2% of agi limitations. Ideally, Flatirons Inc.
should construct a fully accountable plan which covers home office expenses as well, for the employees with home offices would, in effect, get deductions for agi rather than itemized deductions, and the corporation could deduct those reimbursements if adequate substantiation was present. However, as it stands now, the shareholders do not report any reimbursements nor any expenses relating to all allowable employee expenses except those dealing with home offices. All home office expenses may be deducted as miscellaneous itemized deductions subject to the 2% of agi limitation.