Reporting reimbursements of employee business expenses on your tax return


As an employee you get several reimbursements for the expenses you incurred on behalf of the employer.  Most of them are not required to be reported on your tax return.  However IRS has specific rules relating to such reimbursements and you should know them well as they affect your tax return.

Many of you receive reimbursements for expenses incurred on behalf of your employer.  Sometimes the employer makes specific reimbursements towards particular expenses (which is called accountable plan), while some others prefer to pay a lump sum amount regularly to the employees for taking care of various expenses (which is called non-accountable plan).

Under the non-accountable plan, the employer pays a fixed amount of money at regular intervals to take care of business expenses.  Under this plan, you are not required to provide proof of expenses to your employer.  The employer will include this amount on your form W-2 as if they are wages.  If you want to claim deductions for the business expenses incurred out of that money, you will need to file form 2106 or form 2106-EZ declaring such expenses.  You will also be required to itemize your deductions.

Read the following tips on reporting such reimbursements on your tax Return:

1. You need to confirm with your employer whether the reimbursement is under accountable or non-accountable plan.  Under the accountable plan, you are reimbursed with the actual expenses, adequate accounting is made of these expenses and excess if any is returned to your employer.  In such a case, no reporting is required by you and your employer.

2. In a situation where the actual expenses are reimbursed, adequate accounting and return of excess is required, but if the excess is not returned, then excess will be treated as your wages and will be included on W2 form box 1 by your employer.

3. If you are given a mileage allowance up to the federal rate, with appropriate accounting and return of excess policies being implemented, but the excess is not returned, the excess amount will be treated as your wages and will be reported on your W-2 form.

4. If you are given a mileage allowance which exceeds the federal rate, with adequate accounting up to the federal rate only and excess not returned, the excess amount will be reported on your W-2 form in box 1.  The amount which is equal to the federal rate is reported only in box 12.

5. In case of a non-accountable plan, where adequate accounting or return of excess or both are not required by the employer, the entire amount will be treated as wages and will be included in box 1.

6. If you are reimbursed under non-accountable plan and want to claim deduction for the expenses which are not reimbursed, then you need to allocate your reimbursement.  This is possible when your employer does not identify clearly how much money is allowed under each head of expense.  So if you are paid a single amount covering meals and entertainment as well as other business expenses, you have to allocate that single payment so that you can enter appropriate amounts on form 2106 line 7 column A and column B.

7. There are certain limits on the reimbursement of business expenses to the employees:

a. Certain meal and entertainment expenses are subject to a limit of 50%

b. Itemized deductions, including employee business expenses are subject to a limit of 2%

c. If your adjusted gross income (AGI) exceeds $159,950 ($79,975 if your filing your return as married filing separately), then there are limitations on the total itemized deductions including the reimbursement of employee business expenses.

8. If you are employed by a state or local government and paid totally or partially on fee basis, you can claim employee business expenses as an adjustment to gross income and there is no need to itemize your deductions on schedule A.

Source by Chintamani