Determining If Business Expenses Reimbursements Are Taxable

Whether expense reimbursements are taxable depends on a few factors, including the type of reimbursement, the employer’s policy, and the employee’s tax situation. If you and your employer follow the guidelines, the IRS will not consider the reimbursements taxable income.

Is Your Employer’s Plan Accountable?

In general, expense reimbursements made under an accountable plan are not taxable. An expense reimbursement plan must meet the following criteria to be considered accountable:

  • Expenses must have business connections.
    • Some expenses that aren’t deductible include travel to and from your usual place of work and the costs of work attire (unless it is a required uniform or safety gear).
  • Each expense must have documentation showing its nature, the date, and the cost.
    • Keep a mileage log for car travel and ask for receipts whenever possible.
  • Employees must return any excess reimbursements within 120 days.

If an employer does not have an accountable plan, any reimbursements, even those that are ordinary and necessary, are taxable.

Exceptions to the Accountability Rule

There are a few exceptions to this rule. For example, if a company reimburses an employee for travel expenses that are less than the federal per diem rate, the reimbursement is not taxable. Additionally, suppose a company reimburses an employee for business expenses incurred while traveling outside the United States. In that case, an employee may exclude that reimbursement from taxable income under the foreign-earned income exclusion.

Keep Accurate Records

Employees and their employers must keep accurate and complete records of all expenses. Consider using a pre-built expense tracking solution to record your expenses weekly or monthly. Using a structured spreadsheet will help you substantiate your spending.

General expense categories
Expense Report

To ensure your mileage calculations are accurate, consider using an add-on like TripTally to pull mileage data directly from Google Maps into your spreadsheet.

Tips for Expense Reports

Here are some additional things to keep in mind about expense reimbursements:

  • The IRS has strict rules about what expenses are considered ordinary and necessary. Employees should only claim expenses that are directly related to their job duties.
  • Employees should keep receipts for all expenses that they claim for reimbursement. This documentation will help to support their claims if the IRS audits their tax return.
  • Employees should submit their expense reports promptly. Being timely will help ensure that they are reimbursed promptly and do not have to pay taxes on the reimbursement.

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Next, you can learn about the importance of expense reports.