To offer an accountable plan, an employer must comply with three standards:
- The expenses must have a business connection;
- The expenses must be substantiated within a reasonable period; and
- The employee must return any money not spent to the employer, also within a reasonable period.
If any of the three conditions is not met, the reimbursement arrangement is treated as a nonaccountable plan. In other words, the reimbursement is taxable compensation to the employee and subject to employment taxes.
Before a reimbursement can be made, the employer must authorize the purchase for a legitimate business purpose. A purchase for a legitimate business purpose is anything that is deductible under Regs. Sec. 1.62-2, including:
- Travel expenses (either actual or per diem);
- Gas or mileage expenses (either actual or per diem);
- Tools / supplies;
- Home office, including depreciation;
- Cellphone;
- Internet;
- Training and development
- Dues, subscriptions, and professional licenses.
Entertainment expenses are no longer deductible as such at all under the TCJA (Sec. 274(a)(1)). If an employer reimburses entertainment expenses, the reimbursement must be treated as wages (Regs. Secs. 1.62-2(c)(5) and 1.62-2(d)). Examples of nondeductible entertainment expenses under the TCJA include (Regs. Sec. 1.274-2(b)(1)(i)):
- Nightclubs;
- Cocktail lounges;
- Theaters;
- Country clubs;
- Golf and athletic clubs;
- Sporting events
- Hunting / fishing.
Reimbursing an expense does not change the deductibility of the expense itself. For instance, a meal may be reimbursed at 100% of the cost although the expense is only 50% deductible by the company.
