A business expense reimbursement occurs when the employer refunds business expenses initially paid by employees. In many cases, this applies when an employee spends money on a business trip. Examples of typical business expenses include necessities such as food, lodging and transportation. According to IRS code, a business expense reimbursement can sometimes count as income.
Many companies have expense reimbursement policies that set a maximum daily expense reimbursement per employee. The IRS considers those maximum allowance amounts for lodging, meals and transportation a per diem amount. Should the employee spend more than this per diem amount, the employee will normally have to pay that extra expense out of pocket since a company will not reimburse expenses above this maximum amount.
Usually, businesses require employees to turn in expense reimbursement receipts shortly after incurring the expense. This allows the company to maintain up-to-date bookkeeping and tax reporting regarding employee expense reimbursement. Many companies have specific policies that specify an exact time frame for turning in receipts, such as one week or one month. Many companies also require employees to file an expense report using a specific style or template. This expense spreadsheet details how the employee incurred expenses, the amount of the expenses and the reason for each expense.
The IRS requires employers to maintain proof of reimbursement expenses deducted on company tax returns. If the employee receives expense reimbursement from the employer and cannot provide receipts or other documentation to back up the reimbursement, the IRS will consider the reimbursement taxable income for the employee. Unsubstantiated reimbursements can also cause the IRS to disallow deducted expenses from the employer’s tax return. Unsubstantiated reimbursements should appear as taxable income paid by the employer on the employee’s W-2 Form.
No Income Tax
Before incurring a business expense, many companies want employees to receive pre-authorization for the future expenses. Even though this pre-authorization represents an estimate of expected expenses, this process can help an employee to manage expenses. The money employers pay employees as reimbursement for substantiated business expenses is not subject to employment tax or income tax.
- Seattle Pacific University: Business Expense Reimbursement Excerpts of IRS Tax Code
- IRS.gov; Business Expense Reimbursement Excerpts of IRS Tax Code; February 2011
- "Principles of Taxation for Business and Investment Planning, 2010"; Sally Jones and Shelly Rhoades-Catanach; 2009
Brian Bass has written about accountancy-related topics and accounting trends for "Account Today." He works as a senior auditor specializing in manufacturing and financial services companies for one of the Big 5 accounting firms. Bass hold a master's degree in accounting from the University of Utah.