When is an expense reimbursement not taxable?
Under tax law, all payments are taxable unless there is an exception or exclusion. This includes expenses that Kent State has agreed to fund when the payee turns in receipts. The exception to used for expense reimbursements requires an accountable plan. An accountable plan is a provision in the IRS regulations that allows an employer to reimburse employees on a non-taxable basis when certain requirements are met. The IRS regulations include independent contractors in the definition of employee therefore the rules allow independent contractors to qualify for the accountable plan exception. There are three requirements: Business connection, substantiation and return of excess advances.
Business Connection
The business connection requirement means that the expenses are incurred by the employee for services performed as an employee for the payer. The reimbursement or advance must be payment for the expenses and must not be an amount that would have otherwise been paid to the employee as wages.
For example, if an employee travels to an out of town conference which directly related to the employee's job, the cost of airfare would be allowable as a deduction by the employee on the employee's individual income tax return as a business expense. The business connection requirement is met to allow the employer to reimburse the employee for those expenses on a tax free basis as long as the next two requirements are also met.
Additional requirements for attending conferences
When attending conferences, in addition to the accountable plan business connection requirement, one of the following must be met:
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The education must maintain or improve skills related to rendering services for Kent State.The education cannot be required to get into the field (as opposed to staying in the field) or qualify the employee for a new line or work
OR -
The education is required (by law or in a job description) to keep the position or job with Kent State.
Substantiation
The payee must substantiate or deemed to have substantiated the expenses. Receipts and/or canceled checks and invoices must show the nature and amount of the expenditure. Expenses for standard mileage rate for business (not commuting) miles and the meal per diem are deemed substantiated without receipts.
For example, an employee drives a personal vehicle for business. The employee submits a log listing the date and time, the business purpose and the mileage.
The employee must account for the expenses within a reasonable time period of time after incurring the expense. What is a reasonable period of time depends upon the facts and circumstances of each situation. The IRS will consider 60 days after they were paid or incurred to be reasonable.
Return of excess
If the employee receives an advance of when the employee incurs the expense then the employee must return any excess allowance over the expenses incurred within a reasonable period of time.
For example, an employee receives an advance of $500 for a trip directly related to the job. The employee substantiates with receipts within 60 days of incurring $300 of expenses. If the employee does not return the $200 within the 60 days, then the $200 must be included in the employees wages.
Conclusion
The situations at the university are not always simple. To be sure that the payment is handled properly, please ask for guidance before promising an individual an expense reimbursement. Please email tax@kent.edu for help.