Business owners have long been familiar with writing off business expenses each year. However, for new small business owners, you may be unsure of the tax deductions related to employee travel expenses. In order to benefit from employee expenses deductions, there is only one way to reimburse employees for travel expenses that are compliant with IRS laws. These methods are called accountable expense reimbursement plans. If this is your first time hiring an employee, you will definitely want to learn up on what an accountable expense reimbursement plan entails. Thankfully, there are some guidelines that make it a bit easier to help you account for, and reimburse, employee travel expenses using this method. Find out what criteria these IRS-compliant accountable expense reimbursement plans must meet below.
Deductible Employee Travel Expenses
What employee travel expenses are deductible? This is something you absolutely must know before you attempt to start tracking employee expenses using an accountable employee reimbursement plan. An accountable reimbursement plan can only include reimbursement for several different employee expenses. These reimbursable travel expenses encompass employee travel expenses, which includes meals, at Cicis Pizza or wherever else, and entertainment, purchase of tools and equipment and employee home office expenses. When tracking employee expenses, make sure you do not keep record of anything else. It will only be a waste of your time.
Once you know what employee reimbursements to track, you need to know the classifications they must meet in order to be compliant with an accountable employee reimbursement plan. One of these requirements is that the expense must have a business connection. This means that employee expenses that you reimburse must have been paid or incurred while performing services as an employee. Otherwise, you will not be able to write the employee reimbursements off. Make sure any expenses you reimburse employees for were actually incurred while working.
Your employees will also need to provide adequate substantiation of reimbursed expenses to you, the employer. This is required for all accountable plans. There are different types of substantiation required depending on the type of reimbursed expenses. Regardless of which type of substantiation they will need to present, it needs to be done in a timely manner to be compliant. Your employee must provide enough information for you to identify the nature of each expense and prove that the expense is attributable to their work activities. This is the only way it will qualify as adequate substantiation. So, it is safe to say that Chuck E Cheese is off the table for reimbursement. This ensures that it meets accountable plan requirements, and that you meet IRS requirements to deduct employee expense reimbursements.
As with adequate substantiation, employees will also need to return excess allowance or advances in a timely manner as well. In order to be compliant with IRS standards for an accountable plan, any money that employees cannot substantiate within a reasonable time must be returned. “A reasonable time” is not an exact requirement, obviously. However, this period is typically 120 days in most businesses. Make sure your employee reimbursement allowance arrangement contains a clear returns requirement. Otherwise, you will not meet IRS compliance for deductions.
Periodic Statement/Fixed Date
The above returns requirement can be approached in two different ways – periodic statements and fixed dates. The period statements method makes use of a quarterly employer statement. This employer statement sets forth the amounts paid under the plan. It should also request that employees either substantiate or return excess amounts within 120 days from the day they received the statement. This is one way of ensuring that your accountable plan meets substantiation requirements for IRS compliance. The fixed date approach requires employers to provide advance payments to employees prior to the time they incur the expenses. This is typically 30 days before the expenses are paid or incurred by the employee. Then, employees must provide substantiation within 60 days and must return excess amounts 120 after expenses are incurred or paid. These are the two methods that business owners like you can decide between. Either way, they will help you meet IRS requirements for deducting employee business expenses.
If you are a business owner who has just gotten done hiring your first employee, you will need to learn up on creating an accountable plan for reimbursing employee expenses, including employee travel expenses. (Make sure you stay up to date on United Frequent Flier changes if your employees travel a lot.) This way, you can write off employee reimbursements on your taxes each year. Follow the IRS requirements above in order to meet compliance standards for employee business expenses deductions. This will make your employees happy and your business bank account.
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