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Employer Tax Deductions of Employee Expenses: How to Deduct IRS guidelines for deducting employee business expenses from the corporate tax return under both accountable and nonaccountable plans, including reimbursements and per diems.

Whether under a reimbursement (i.e. employee uses their money for business expenses and is reimbursed later) or allowance (i.e. per diem) arrangement, employer deduction of employee business expenses depends on whether they have an accountable or nonaccountable plan. Further, in some cases, an expense might be fully deductible on the books but only partially deductible on the company tax return.

Accountable Plans*

Expenses deducted under an accountable plan must be deducted as travel, meals or entertainment expenses. Each employee must have paid or incurred deductible expenses while performing services as an employee of the company and return any excess reimbursements within a reasonable amount of time.

Further, each employee must adequately account to the business for these expenses within a reasonable period of time. For more information about adequately accounting for expenses please review the post, IRS Rules for Recording Business Expenses: Travel, Transportation, Meals and Entertainment Expense.

Under a per diem arrangement (where the company advances money to employees) additional requirements must be met, such as the advance must be reasonably calculated not to exceed the amount of anticipated expenses and the business must make the advance within a reasonable period of time of employee paying or incurring the expense.

According to the IRS, under a reimbursement plan a reasonable period of time means employees account for their expenses within 60 days after they were paid or incurred, or under an allowance plan (i.e. per diem) within 30 days of the time the employee pays or incurs the expense. Excess reimbursements must be returned within 120 days after the expense was paid or incurred and the company must give a periodic statement (minimum quarterly) to employees that asks employees to either adequately account for outstanding advances and that they company within 120 days of the date of the statement.

Now to the important part …

Deducting Expenses Under an Accountable Plan

Meals and Entertainment
All expense types, travel, meals, and entertainment, can be deducted on the company’s tax return if the company reimburses its employees.Typically, only 50% of meals and entertainment expenses can be deducted.** This deduction limit applies even if the company reimburses their employees for 100% of the expense.

Other forms of meals and entertainment expenses and how to deduct them.

Employee Activities
Expenses incurred for providing recreational, social, or similar activities (including the use of a facility) for employees are 100% deductible. The benefit must be primarily to the employees that are not highly compensated.***

Director, Stockholder, or Employee Meetings
Expenses directly related to these meetings can be deducted. The main purpose of the meeting must be the company’s business. These expenses are subject to the 50% limit.

Trade Association Meetings
Expenses related to and necessary for attending business meetings or conventions of certain tax-exempt organizations are deductible.

How to report these deductions on a tax return are as follows:

  • Sole Proprietor (or filling as a single member LLC): deduct travel reimbursements on line 24a and the deductible part of the meals and entertainment reimbursement on line 24b, Schedule C (Form 1040) or line 2, Schedule C-EZ (Form 1040).
  • Corporation: reimbursements are included on the “Other Deductions” line of Form 1120, U.S. Corporation Income Tax Return.

 Deducting Per Diem and Car Allowances (Accountable and Nonaccountable Plans)

Allowances Less Than or Equal to the Federal Rate
The allowance is deducted as travel expenses, including meals that may be subject to the 50% limit.

Allowances More than the Federal Rate
Employee allowances above the federal rate must be reported as two separate items.

  1. The allowance amount up to the federal rate is treated as reimbursed under an accountable plan. Travel expenses, including meals that may be subject to the 50% limit, are deducted from the business return.
  2. The amount that is more than the federal rate is treated as reimbursed under a nonaccountable plan. Travel expenses, including meals that may be subject to the 50% limit, are deducted from the business return.

Reporting Requirements for Expenses on Employee W-2’s:
IF the type of reimbursement (or other expense allowance) arrangement is under

An Accountable Plan with THEN the employer reports on Form W-2
Actual expense reimbursement:
Adequate counting made and excess returned
No amount.
Actual expense reimbursement:
Adequate accounting and return of excess both required by excess not returned.
The excess amount as wages in box 1.
Per diem or mileage allowance up to the federal rate:
Adequate accounting made and excess returned
No amount.
Per diem or mileage allowance up to the federal rate:
Adequate accounting made up to the federal rate only and excess not returned.
The excess amount as wages in box 1. The amount up to the federal rate is reported only in box 12 (code L)—it is not reported in box 1.
A Nonaccountable Plan with:
Either adequate accounting or return of excess (or both) not required by plan.
The entire amount as wages in box 1.
No reimbursement plan The entire amount as wages in box 1.

You can find this table on the IRS website, here.

Nonaccountable Plans

All amounts paid, or treated as paid, under a nonaccountable plan are reported as wages on Form W-2. The payments are subject to income tax withholding, social security, Medicare, and federal unemployment taxes. You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees’ pay in chapter 2. Deduct the allowable amount as compensation or wages on the appropriate line of your income tax return, as provided in its instructions.

* Please note that is any expenses reimbursed until this arrangements are not substantiated, or an excess reimbursement is not returned within a reasonable period of time by an employee. you cannot treat these expenses as reimbursed under an accountable plan. Instead, treat the reimbursed expenses as paid under a nonaccountable plan.

** Meals and Entertainment expenses also include related expenses such as taxes, tips, admissions (to, say, a nightclub), rent to hold a dinner or cocktail party. The 50% limit does not apply to either of the following:

  1. Expenses for meals or entertainment that is treated as:
    • Compensation to an employee who was the recipient of the meals or entertainment.
    • Wages subject to withholding of federal income tax.
  2. Expenses of meals or entertainment if:
    • A recipient of the meals or entertainment who is not your employee has to include the expenses in gross income as compensation for services or as a prize or award.
    • The company includes that amount on a Form 1099 issues to the recipient, it a Form 1099 is required.

*** A highly compensated employee meets the following requirements

  1. Owned a 10% or more interest in the business during the year or the proceeding year.
  2. Received more than $115,000 in pay for the preceding year. The company can chose to only included employees that were in the top 20% of employees when ranked by pay for the preceding year.

Source: IRS Publication 535, Ch 11, Other Expenses, Reimbursement of Travel, Meals, and Entertainment

About Falcon Expenses, Inc.

Falcon Expenses is an iOS solution for expense tracking and management. Scan receipts, we type merchant, date and amount, auto-track mileage expenses via GPS and log billable hours with an integrated timer. Quickly organize expenses by time period, project or client and easily prepare reports for email to anyone in PDF or spreadsheet formats, all from your phone. Use for reimbursements, taxes, record keeping or invoicing. Falcon Expenses is great for professionals, freelancers, realtors, business travelers, truckers and more. Find out more, here.