Publication 463 |
2000 Tax Year |
Reimbursements
This section explains what to do when you receive an advance or are
reimbursed for any of the employee business expenses discussed in this
publication.
If you received an advance, allowance, or reimbursement for your
expenses, how you report this amount and your expenses depends on
whether the reimbursement was paid to you under an accountable plan or
a nonaccountable plan.
This section explains the two types of plans, how per diem and car
allowances simplify proving the amount of your expenses, and the tax
treatment of your reimbursements and expenses. It also covers rules
for independent contractors.
No reimbursement.
You are not reimbursed or given an allowance for your expenses if
you are paid a salary or commission with the understanding that you
will pay your own expenses. In this situation, you have no
reimbursement or allowance arrangement, and you do not have to read
this section on reimbursements. Instead, see Completing Forms
2106 and 2106-EZ, later, for information on completing
your tax return.
Reimbursement, allowance, or advance.
A reimbursement or other expense allowance arrangement is a system
or plan that an employer uses to pay, substantiate, and recover the
expenses, advances, reimbursements, and amounts charged to the
employer for employee business expenses. Arrangements include per diem
and car allowances.
A per diem allowance is a fixed amount of daily reimbursement your
employer gives you for your lodging, meals, and incidental expenses
when you are away from home on business. (The term "incidental
expenses" is defined in chapter 1
under Standard Meal
Allowance.) A car allowance is an amount your employer gives you
for the business use of your car.
Your employer should tell you what method of reimbursement is used
and what records you must provide.
Employers.
If you are an employer and you reimburse employee business
expenses, how you treat this reimbursement on your employee's Form
W-2 depends in part on whether you have an accountable plan.
Reimbursements treated as paid under an accountable plan, as explained
next, are not reported as pay. Reimbursements treated as paid under
nonaccountable plans, as explained later, are reported as pay. See
Publication 15, Circular E, Employer's Tax Guide, for
information on employee pay.
Accountable Plans
To be an accountable plan, your employer's reimbursement or
allowance arrangement must include all three of the following rules.
- Your expenses must have a business connection -- that
is, you must have paid or incurred deductible expenses while
performing services as an employee of your employer.
- You must adequately account to your employer for these
expenses within a reasonable period of time.
- You must return any excess reimbursement or allowance within
a reasonable period of time.
"Adequate accounting" and "returning excess reimbursements"
are discussed later.
An excess reimbursement or allowance
is any amount you are paid
that is more than the business-related expenses that you adequately
accounted for to your employer.
The definition of reasonable period of time depends on
the facts and circumstances of your situation. However, regardless of
the facts and circumstances of your situation, actions that take place
within the times specified in the following list will be treated as
taking place within a reasonable period of time.
- You receive an advance within 30 days of the time you have
an expense.
- You adequately account for your expenses within 60 days
after they were paid or incurred.
- You return any excess reimbursement within 120 days after
the expense was paid or incurred.
- You are given a periodic statement (at least quarterly) that
asks you to either return or adequately account for outstanding
advances and you comply within 120 days of the
statement.
Employee meets accountable plan rules.
If you meet the three rules for accountable plans, your employer
should not include any reimbursements in your income in box 1 of your
Form W-2. If your expenses equal your reimbursement, you do not
complete Form 2106. You have no deduction since your expenses and
reimbursement are equal.
If your employer included reimbursements in box 1 of your Form
W-2 and you meet all three rules for accountable plans, ask your
employer for a corrected Form W-2.
Accountable plan rules not met.
Even though you are reimbursed under an accountable plan, some of
your expenses may not meet all three rules. Those expenses that fail
to meet all three rules for accountable plans are treated as having
been reimbursed under a nonaccountable plan (discussed later).
Reimbursement of nondeductible expenses.
You may be reimbursed under your employer's accountable plan for
expenses related to that employer's business, some of which are
deductible as employee business expenses and some of which are not
deductible. The reimbursements you receive for the nondeductible
expenses do not meet rule (1) for accountable plans, and they are
treated as paid under a nonaccountable plan.
Example.
Your employer's plan reimburses you for travel expenses while away
from home on business and also for meals when you work late at the
office, even though you are not away from home. The part of the
arrangement that reimburses you for the nondeductible meals when you
work late at the office is treated as paid under a nonaccountable
plan.
The employer makes the decision whether to reimburse employees
under an accountable plan or a nonaccountable plan. If you are an
employee who receives payments under a nonaccountable plan, you cannot
convert these amounts to payments under an accountable plan by
voluntarily accounting to your employer for the expenses and
voluntarily returning excess reimbursements to the employer.
Adequate Accounting
One of the three rules for an accountable plan is that you must
adequately account to your employer for your expenses. You adequately
account by giving your employer a statement of expense, an account
book, a diary, or a similar record in which you entered each expense
at or near the time you had it, along with documentary evidence (such
as receipts) of your travel, mileage, and other employee business
expenses. (See Table 4 in chapter 5
for details you need to
enter in your record and documents you need to prove certain
expenses.)
You must account for all amounts you received from your
employer during the year as advances, reimbursements, or allowances.
This includes amounts you charged to your employer by credit card or
other method. You must give your employer the same type of records and
supporting information that you would have to give to the IRS if the
IRS questioned a deduction on your return. You must pay back the
amount of any reimbursement or other expense allowance for which you
do not adequately account or that is more than the amount for which
you accounted.
Per Diem and Car Allowances
If your employer reimburses you for your expenses using a per diem
or a car allowance, you can generally use the allowance as proof for
the amount of your expenses. A per diem or car allowance satisfies the
adequate accounting requirements for the amount of your expenses only
if all four of the following conditions apply.
- Your employer reasonably limits payments of your expenses to
those that are ordinary and necessary in the conduct of the trade or
business.
- The allowance is similar in form to and not more than the
federal rate (defined later).
- You prove the time (dates), place, and business purpose of
your expenses to your employer (as explained in Table 4)
within a reasonable period of time.
- You are not related to your employer (as defined under
Standard Meal Allowance in chapter 1).
If you are related
to your employer, you must be able to prove your expenses to the IRS
even if you have already adequately accounted to your employer and
returned any excess reimbursement.
If the IRS finds that an employer's travel allowance practices
are not based on reasonably accurate estimates of travel costs
(including recognition of cost differences in different areas for per
diem amounts), you will not be considered to have accounted to your
employer. In this case, you must be able to prove your expenses to the
IRS.
The federal rate.
The federal rate can be figured using any one of the following
methods.
- For per diem amounts:
- The regular federal per diem rate.
- The standard meal allowance.
- The high-low rate.
For car expenses:
- The standard mileage rate.
- A fixed and variable rate (FAVR).
For per diem amounts, use the rate in effect for the area where you
stop for sleep or rest.
Regular federal per diem rate.
The regular federal per diem rate is the highest amount that the
federal government will pay to its employees for lodging, meals, and
incidental expenses (or meals and incidental expenses only) while they
are traveling away from home in a particular area. The rates are
different for different locations. Your employer should have these
rates available. (Employers can get Publication 1542,
which gives the
rates in the continental United States for the current year.)
The standard meal allowance.
The standard meal allowance (discussed in chapter 1)
is the federal
rate for meals and incidental expenses (M&IE). The rate for most
small localities in the United States is $30. Most major cities and
many other localities qualify for higher rates. The rates for all
localities within the continental United States are listed in
Publication 1542.
You receive an allowance only for meals and incidental expenses
when your employer does one of the following.
- Provides you with lodging (furnishes it in kind).
- Reimburses you, based on your receipts, for the actual cost
of your lodging.
- Pays the hotel, motel, etc., directly for your
lodging.
- Does not have a reasonable belief that you had (or will
have) lodging expenses, such as when you stay with friends or
relatives or sleep in the cab of your truck.
- Computes the allowance on a basis similar to that used in
computing your compensation, such as number of hours worked or miles
traveled.
High-low rate.
This is a simplified method of computing the federal per diem rate
for travel within the continental United States. It eliminates the
need to keep a current list of the per diem rate for each city.
Under the high-low method, the per diem amount for travel during
2000 is $201 (including $42 for M&IE) for certain high-cost
locations. All other areas have a per diem amount of $124 (including
$34 for M&IE). (Employers can get Publication 1542,
which gives
the areas eligible for the $201 per diem amount under the high-low
method for all or part of the year.)
Prorating the standard meal allowance on partial days of
travel.
The standard meal allowance is for a full 24-hour day of travel. If
you travel for part of a day, such as on the days you depart and
return, you must prorate the full-day M&IE rate. This rule also
applies if your employer uses the regular federal per diem rate or the
high-low rate.
You can use either of the following methods to figure the federal
M&IE for that day.
- Method 1:
- For the day you depart, add 3/4 of the standard
meal allowance amount for that day.
- For the day you return, add 3/4 of the standard
meal allowance amount for the preceding day.
Method 2: Prorate the standard meal allowance
using any method that you consistently apply and that is in accordance
with reasonable business practice. For example, an employer can treat
2 full days of per diem (that includes M&IE) paid for travel away
from home from 9 a.m. of one day to 5 p.m. of the next day as being no
more than the federal rate. This is true even though a federal
employee would be limited to a reimbursement of M&IE for only 1 1/2 days of the federal M&IE rate.
The standard mileage rate.
This is a set rate per mile
that you can use to compute your deductible car expenses. For 2000,
the standard mileage rate is 32 1/2 cents a mile for all
business miles. This rate is adjusted periodically.
Fixed and variable rate (FAVR).
This is an allowance your employer
may use to reimburse your car expenses. Under this method, your
employer pays an allowance that includes a combination of payments
covering fixed and variable costs, such as a cents-per-mile rate to
cover your variable operating costs (such as gas, oil, etc.) plus a
flat amount to cover your fixed costs (such as depreciation (or lease
payments), insurance, etc.). If your employer chooses to use this
method, your employer will request the necessary records from you.
Reporting your expenses with a per diem or car allowance.
If your reimbursement is in the form of an allowance received under
an accountable plan, the following two facts affect your reporting.
- The federal rate.
- Whether the allowance or your actual expenses were more than
the federal rate.
The following discussions explain where to report your expenses
depending upon how the amount of your allowance compares to the
federal rate.
Allowance LESS than or EQUAL to the federal rate.
If your allowance is less than or equal to the federal rate, the
allowance will not be included in box 1 of your Form W-2. You do
not need to report the related expenses or the allowance on your
return if your expenses are equal to or less than the allowance.
However, if your actual expenses are more than your allowance, you
can complete Form 2106 and deduct the excess amount on Schedule A
(Form 1040). If you are using actual expenses, you must be able to
prove to the IRS the total amount of your expenses and reimbursements
for the entire year. If you are using the standard meal allowance or
the standard mileage rate, you do not have to prove that amount.
Example 1.
In April, Jeremy takes a 2-day business trip to Denver. The federal
rate for Denver is $125 per day. As required by his employer's
accountable plan, he accounts for the time (dates), place, and
business purpose of the trip. His employer reimburses him $125 a day
($250 total) for living expenses. Jeremy's living expenses in Denver
are not more than $125 a day.
Jeremy's employer does not include any of the reimbursement on his
Form W-2 and Jeremy does not deduct the expenses on his return.
Example 2.
In June, Matt takes a 2-day business trip to Boston. Matt's
employer uses the high-low method to reimburse employees. Since Boston
is a high-cost area, Matt is given an advance of $180 a day ($360
total) for his lodging, meals, and incidental expenses. Matt's actual
expenses totaled $490.
Since Matt's $490 of expenses are more than his $360 advance, he
includes the excess expenses when he itemizes his deductions. Matt
completes Form 2106 (showing all of his expenses and
reimbursements). He must also allocate his reimbursement between his
meals and other expenses as discussed later under Completing
Forms 2106 and 2106-EZ.
Example 3.
Nicole drives 10,000 miles a year for business. Under her
employer's accountable plan, she accounts for the time (dates), place,
and business purpose of each trip. Her employer pays her a mileage
allowance of 20 cents a mile.
Since Nicole's $3,250 expenses computed under the standard mileage
rate (10,000 miles x 32 1/2 cents) are more than her
$2,000 reimbursement (10,000 miles x 20 cents), she itemizes her
deductions to claim the excess expenses. Nicole completes Form 2106
(showing all of her expenses and reimbursements) and enters
$1,250 ($3,250 - $2,000) as an itemized deduction.
Allowance MORE than the federal rate.
If your allowance is more than the federal rate, your employer must
include the allowance amount up to the federal rate in box 13 of your
Form W-2. This amount is not taxable. However, the excess
allowance will be included in box 1 of your Form W-2. You must
report this part of your allowance as if it were wage income.
If your actual expenses are less than or equal to the federal rate,
you do not complete Form 2106 or claim any of your expenses on your
return.
However, if your actual expenses are more than the federal rate,
you can complete Form 2106 and deduct those excess expenses. You must
report on Form 2106 your reimbursements up to the federal rate (as
shown in box 13 of your Form W-2) and all your expenses. You
should be able to prove these amounts to the IRS.
Example 1.
Laura lives and works in Austin. Her employer sent her to
Albuquerque for 2 days on business. Laura's employer paid the hotel
directly for her lodging and reimbursed Laura $40 a day ($80 total)
for meals and incidental expenses. Laura's actual meal expenses were
not more than the federal rate for Albuquerque, which is $38 per day.
Table 5. Reporting Travel, Entertainment, Gift and Car Expenses and Reimbursements
Her employer included the $4 that was more than the federal rate
[($40 - $38) x 2] in box 1 of Laura's Form
W-2. Her employer shows $76 ($38 a day x 2) in box 13 of
her Form W-2. This amount is not included in Laura's income.
Laura does not have to complete Form 2106; however, she must include
the $4 in her gross income as wages (by reporting the total amount
shown in box 1 of her Form W-2).
Example 2.
Joe also lives in Austin and works for the same employer as Laura.
In May the employer sent Joe to San Diego for 4 days and paid the
hotel directly for Joe's hotel bill. The employer reimbursed Joe $50 a
day for his meals and incidental expenses. The federal rate for San
Diego is $46 a day.
Joe can prove that his actual meal expenses totaled $290. His
employer's accountable plan will not pay more than $50 a day for
travel to San Diego, so Joe does not give his employer the records
that prove that he actually spent $290. However, he does account for
the time, place, and business purpose of the trip. This is Joe's only
business trip this year.
Joe was reimbursed $200 ($50 x 4 days), which is $16 more
than the federal rate of $184 ($46 x 4 days). The employer
includes the $16 as income on Joe's Form W-2 in box 1. The
employer also enters $184 in box 13 of Joe's Form W-2.
Joe completes Form 2106 to figure his deductible expenses. He
enters the total of his actual expenses for the year ($290) on Form
2106. He also enters the reimbursements that were not included in his
income ($184). His total deductible expense, before the 50% limit, is
$106. After he figures the 50% limit on his unreimbursed meals and
entertainment, he will include the balance, $53, as an itemized
deduction.
Example 3.
Debbie drives 10,000 miles for business. Under her employer's
accountable plan, she gets reimbursed 35 cents a mile, which is 2 1/2 cents a mile more than the standard mileage rate.
Debbie's employer must include the reimbursement amount up to the
standard mileage rate, $3,250 (10,000 miles x 32 1/2
cents), in box 13 of her Form W-2. That amount is not taxable.
Her employer must also include $250 (10,000 miles x 2 1/2 cents) in box 1 of her Form W-2. This is the
reimbursement that is more than the standard mileage rate.
If Debbie's expenses are equal to or less than the standard mileage
rate, she would not complete Form 2106. If her expenses are more than
the standard mileage rate, she would complete Form 2106 and report her
total expenses and reimbursement (shown in box 13 of her Form
W-2). She would then claim the excess expenses as an itemized
deduction.
Returning Excess Reimbursements
Under an accountable plan, you are required to return any excess
reimbursement or other expense allowances for your business expenses
to the person paying the reimbursement or allowance. Excess
reimbursement means any amount for which you did not adequately
account within a reasonable period of time. For example, if you
received a travel advance and you did not spend all the money on
business-related expenses, or you do not have proof of all your
expenses, you have an excess reimbursement.
"Adequate accounting" and "reasonable period of time"
were discussed earlier in this chapter. Travel advance.
You receive a travel advance if your employer provides you with an
expense allowance before you actually have the expense, and the
allowance is reasonably expected to be no more than your expense.
Under an accountable plan, you are required to adequately account to
your employer for this advance and to return any excess within a
reasonable period of time.
If you do not adequately account for or do not return any excess
advance within a reasonable period of time, the amount you do not
account for or return will be treated as having been paid under a
nonaccountable plan (discussed later).
Unproved amounts.
If you do not prove that you actually traveled on each day for
which you received a per diem or car allowance (proving the elements
described in Table 4), you must return this unproved amount
of the travel advance within a reasonable period of time. If you do
not do this, the unproved amount will be considered paid under a
nonaccountable plan (discussed later).
Per diem allowance MORE than federal rate.
If your employer's accountable plan pays you an allowance that is
higher than the federal rate, you do not have to return the difference
between the two rates for the period you can prove business-related
travel expenses. However, the difference will be reported as wages on
your Form W-2. This excess amount is considered paid under a
nonaccountable plan (discussed later).
Example.
Your employer sends you on a 5-day business trip to Phoenix and
gives you a $225 ($45 x 5 days) advance to cover your meals and
incidental expenses. The federal per diem for meals and incidental
expenses for Phoenix is $42. Your trip lasts only 3 days. Under your
employer's accountable plan, you must return the $90 ($45 x 2
days) advance for the 2 days you did not travel. You do not have to
return the $9 difference between the allowance you received and the
federal rate for Phoenix [($45 - $42) x 3 days].
However, the $9 will be reported on your Form W-2 as wages.
Nonaccountable Plans
A nonaccountable plan is a reimbursement or expense allowance
arrangement that does not meet one or more of the three rules listed
earlier under Accountable Plans.
In addition, even if your employer has an accountable plan, the
following payments will be treated as being paid under a
nonaccountable plan:
- Excess reimbursements you fail to return to your employer,
and
- Reimbursement of nondeductible expenses related to your
employer's business. See Reimbursement of nondeductible expenses,
earlier, under Accountable Plans.
An arrangement that repays you for business expenses by
reducing the amount reported as your wages, salary, or other pay will
be treated as a nonaccountable plan. This is because you are entitled
to receive the full amount of your pay whether or not you have any
business expenses.
If you are not sure if the reimbursement or expense allowance
arrangement is an accountable or nonaccountable plan, ask your
employer.
Reporting your expenses under a nonaccountable plan.
Your employer will combine the amount of any reimbursement or other
expense allowance paid to you under a nonaccountable plan with your
wages, salary, or other pay. Your employer will report the total in
box 1 of your Form W-2.
You must complete Form 2106 or 2106-EZ and itemize your
deductions to deduct your expenses for travel, transportation, meals,
or entertainment. Your meal and entertainment expenses will be subject
to the 50% limit discussed in chapter 2.
Also, your total expenses
will be subject to the 2%-of- adjusted-gross-income limit that applies
to most miscellaneous itemized deductions.
Example 1.
Kim's employer gives her $500 a month ($6,000 total for the year)
for her business expenses. Kim does not have to provide any proof of
her expenses to her employer, and Kim can keep any funds that she does
not spend.
Kim is being reimbursed under a nonaccountable plan. Her employer
will include the $6,000 on Kim's Form W-2 as if it were wages.
If Kim wants to deduct her business expenses, she must complete Form
2106 or 2106-EZ and itemize her deductions.
Example 2.
Kevin is paid $2,000 a month by his employer. On days that he
travels away from home on business, his employer designates $50 a day
of his salary as paid to reimburse his travel expenses. Because his
employer would pay Kevin his monthly salary whether or not he was
traveling away from home, the arrangement is a nonaccountable plan. No
part of the $50 a day designated by his employer is treated as paid
under an accountable plan.
Rules for Independent Contractors and Clients
This section provides rules for independent contractors who incur
expenses on behalf of a client or customer. The rules cover the
reporting and substantiation of certain expenses discussed in this
publication, and they affect both independent contractors and their
clients or customers.
You are considered an independent contractor if you are
self-employed and you perform services for a customer or client.
Accounting to Your Client
If you received a reimbursement or an allowance for travel,
entertainment, or gift expenses that you incurred on behalf of a
client, you should provide an adequate accounting of these expenses to
your client. If you do not account to your client for these expenses,
you must include any reimbursements or allowances in income. You must
keep adequate records of these expenses whether or not you account to
your client for these expenses.
If you do not separately account for and seek reimbursement for
meals and entertainment in connection with providing services for a
client, you are subject to the 50% limit on those expenses. See
50% Limit in chapter 2.
Adequate accounting.
As a self-employed person, you adequately account by reporting your
actual expenses. You should follow the recordkeeping rules in chapter 5.
How to report.
For information on how to report expenses on your tax return, see
Self-employed at the beginning of this chapter. Required Records for
Clients or Customers
If you are a client or customer, you generally do not have to keep
records to prove the reimbursements or allowances you give, in the
course of your business, to an independent contractor for travel or
gift expenses incurred on your behalf. However, you must keep records
if:
- You reimburse the contractor for entertainment expenses
incurred on your behalf, and
- The contractor adequately accounts to you for these
expenses.
Contractor adequately accounts.
If the contractor adequately accounts to you for entertainment
expenses, you (the client or customer) must keep records documenting
each element of the expense, as explained in chapter 5.
Use your
records as proof for a deduction on your tax return. If entertainment
expenses are accounted for separately, you are subject to the 50%
limit on entertainment. If the contractor adequately accounts to you
for reimbursed amounts, you do not have to report the amounts on an
information return.
Contractor does not adequately account.
If the contractor does not adequately account to you for allowances
or reimbursements of entertainment expenses, you do not have to keep
records of these items. You are not subject to the 50% limit on
entertainment in this case. You can deduct the reimbursements or
allowances as payment for services if they are ordinary and necessary
business expenses. However, you must file Form 1099-MISC,
Miscellaneous Income, to report amounts paid to the
independent contractor if the total of the reimbursements and any
other fees is $600 or more during the calendar year.
Previous| First | Next
Publication Index | IRS-Forms Main | Home
|