Below you’ll find the requirements for an expense reimbursement system that satisfies both Generally Accepted Accounting Principles and the IRS. We will be adhering to these guidelines and allowances will be set up when expenses do not qualify as part of an accountable plan (see definition below)
Accountable Plan
If a plan meets IRS regulations, the plan is called an accountable plan and reimbursements are not reported on form W-2. To qualify a plan as accountable, your employer must see to it that you submit adequate proof of your expenditures.
A reimbursement or allowance agreement is an accountable plan if it requires you to:
1. Adequately account to your employer for your expenses (see below for an explanation) and
2. Return to your employer any excess reimbursement or allowance that you do not show was spent for ordinary and necessary business expenses.
If these requirements are met and your expenses are fully reimbursed, you do not report the expenses or the reimbursement on your return. Employees can adequately account to their employee by submitting bills and an account book, diary, or similar record in which he/she enters each expense at or near the time they incurred it. They must account to their employer for all amounts received as advances, reimbursements, or allowances including amounts charged on company credit card. They must also pay back any reimbursements in access of the expenses that are adequately accountable for.
Please note that the IRS is very specific as to the types of reimbursements that are considered business expenses. For example, the IRS does not accept a direct payment of individual cell phones unless the company has a plan with a certain provider and the employee has a separate phone for personal use. The IRS does allow a reimbursement for calls itemized in a log or journal that is to accompany an expenses reimbursement form stating business purpose of such calls. In the case of automobile expenses, the IRS does not allow the payment of actual costs related to auto expenses such as gas reimbursement or the payment of a lease/financing payment. The acceptable method for reimbursement is based on a mileage allowance. The rate of mileage allowance will remain in accordance with current IRS guidelines. If your employer reimbursed you based on the IRS rate in effect at the time of the reimbursement, then the amount of your allowance is treated as substantiated, provided you show the time, place and business purpose of your travel.
If the allowance is in the form of an advance it must be given within a reasonable time before the anticipated travel and you must also be required to return within a reasonable time any portion that covers mileage that you have not substantiated. If these conditions are met, the allowance is not reported on the employees W-2.
Non Accountable Plan
Under this plan there is no need to adequately account for your expenses and it allows you to keep an excess reimbursements. Instead, an allowance amount is set up to cover expenses and is paid directly to the employee who is then responsible for their expenses. However any amounts paid under this plan are reported on the employees form W-2. They in turn can deduct them on their personal tax form (Form 2106)