How To Treat Reimbursements

How you treat reimbursements depends on the arrangement you have with your employer.

There are two basic types of reimbursement arrangements -- accountable plans and nonaccountable plans. You can tell the type of plan you are reimbursed under by the way the reimbursement is reported on your Form W-2.

Accountable Plans

If you are reimbursed under an accountable plan, your employer should not include any reimbursement in your income in box 1 of your Form W-2. To be an accountable plan, your employer's reimbursement arrangement must require you to meet all three of the following rules.

1. Your expenses must have a business connection -- that is, your expenses must be deductible under the rules for qualifying education explained earlier.
2. You must adequately account to your employer for your expenses within a reasonable period of time.
3. You must return any reimbursement or allowance in excess of the expenses accounted for within a reasonable period of time.

Any part of your reimbursement that does not meet all three rules is considered paid under a nonaccountable plan.

Expenses equal reimbursement. If your expenses equal your reimbursement, you do not complete Form 2106 or 2106-EZ. Because your expenses and reimbursements are equal, you do not have a deduction.

Excess expenses. If your expenses are more than your reimbursement, you can deduct your excess expenses. This is discussed later under Where To Deduct Expenses.

Allocating your reimbursements for meals. Because your excess meal expenses are subject to the 50% limit, you must figure them separately from your other expenses. If your employer paid you a single amount to cover both meals and other expenses, you must allocate the reimbursement so that you can figure your excess meal expenses separately. You make the allocation as follows.

1. Divide your meal expenses by your total expenses.
2. Multiply your total reimbursement by the result from (1). This is the allocated reimbursement for your meal expenses.
3. Subtract the amount figured in (2) from your total reimbursement. The difference is the allocated reimbursement for your other expenses of qualifying education.

Example. Your employer paid you an expense allowance of $2,000 under an accountable plan. The allowance was to cover all of your expenses of traveling away from home to take a 2-week training course for work. There was no indication of how much of the reimbursement was for each type of expense. Your actual expenses equal $2,500 ($425 for meals + $700 lodging + $150 transportation expenses + $1,225 for books and tuition).

You must allocate the reimbursement between the $425 meal expenses and the $2,075 other expenses. The allocated reimbursement for meals is $340 and the allocated reimbursement for other expenses is $1,660, figured in the following steps.

1. You divide $425 (your meal expenses) by $2,500 (your total expenses). The result is .17.
2. You multiply $2,000 (your reimbursement) by .17. The $340 result is the allocated reimbursement for your meal expenses.
3. You subtract $340 from $2,000. The $1,660 difference is the allocated reimbursement for your other expenses of qualifying education.

Your excess meal expenses are $85 ($425 - $340) and your excess other expenses are $415 ($2,075 - $1,660). After you apply the 50% limit to your meals, you have an educational expense deduction of $457.50 [($85 × 50%) + $415].

Nonaccountable Plans

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 and report the total in box 1 of your Form W-2.

You can deduct your expenses regardless of whether they are more than, less than, or equal to your reimbursement. This is discussed later under Where To Deduct Expenses. An illustrated example of a nonaccountable plan, using Form 2106-EZ, is shown at the end of this publication.

Reimbursements for nondeductible expenses. Reimbursements you received for nondeductible expenses are treated as paid under a nonaccountable plan. You must include them in your income. For example, you must include in your income reimbursements your employer gave you for expenses of education that:

1. You need to meet the minimum educational requirements for your job, or
2. Are part of a program of study that can qualify you for a new trade or business.

Where To Deduct Expenses

Self-employed persons and employees report their educational expenses differently.

The following information explains what forms you must use to deduct the cost of your qualifying education.

Self-Employed Persons

If you are self-employed, you must report the cost of your qualifying education on the appropriate form used to report your business income and expenses ( Schedule C, C-EZ, or F). If your educational expenses include expenses for a car or truck, travel, or meals, report them the same way you report other business expenses for those items. See the instructions for the form you file for information on how to complete it.

Employees

If you are an employee, you can deduct the cost of qualifying education only if you were not reimbursed by your employer or if the costs exceeded your reimbursement. (Amounts your employer paid under a nonaccountable plan and included in box 1 of your Form W-2 are not considered reimbursements.)

Include the cost of your qualifying education with your deduction for any other employee business expenses on line 20 of Schedule A (Form 1040). (Special rules for expenses of certain performing artists and fee-basis officials and for impairment-related work expenses are explained later.) This deduction is subject to the 2%-of-adjusted-gross-income limit that applies to most miscellaneous itemized deductions.

Form 2106 or 2106-EZ. To figure your deduction for employee business expenses, including qualifying education, you generally must complete Form 2106 or 2106-EZ.

Form not required. Do not complete either Form 2106 or 2106-EZ if:

• You were not reimbursed for any of your expenses, and
• You are not claiming travel, transportation, or meal expenses.

If you meet both of these requirements, enter the expenses directly on line 20 of Schedule A (Form 1040). (Special rules for expenses of certain performing artists and fee-basis officials and for impairment-related work expenses are explained later.)

Using Form 2106-EZ. This form is shorter and easier to use than Form 2106. Generally, you can use this form if:

• You were not reimbursed for any of your expenses, and
• You are using the standard mileage rate if you are claiming vehicle expenses.

If you do not meet both of these requirements, use Form 2106.

Performing artists and fee-basis officials. If you are a qualified performing artist, or a state (or local) government official who is paid in whole or in part on a fee basis, you can deduct the cost of your qualifying education as an adjustment to gross income rather than as an itemized deduction.

Include the cost of your qualifying education with any other employee business expenses on line 32 of Form 1040. You do not have to itemize your deductions on Schedule A (Form 1040), and the deduction is not subject to the 2%-of-adjusted-gross-income limit. You must complete Form 2106 or 2106-EZ to figure your deduction even if you meet the requirements described earlier under Form not required.

For more information on qualified performing artists, see Publication 463.

Impairment-related work expenses. If you are disabled and have impairment-related work expenses that are necessary for you to be able to get qualifying education, you can deduct these expenses on line 27 of Schedule A (Form 1040). They are not subject to the 2%-of-adjusted-gross-income limit. To deduct these expenses, you must complete Form 2106 or 2106-EZ even if you meet the requirements described earlier under Form not required.

For more information on impairment-related work expenses, see Publication 463.

Previous| First | Next

Publication Index | IRS-Forms Main | Home