Accountable Plans

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Accountable Plans

• Anne E. Davenport
• Tax Manager, UNC Charlotte

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Income
Income is governed under 61 of the Internal
Revenue Code Except as provided in this
subtitle, gross income means all income, from
whatever source derived cash or noncash
benefit fringes, found money, gambling,
babysitting, raffles, lotteries, barters,
scholarships, gifts, housing, donations, eBay
sales, garage sale proceeds, embezzlement, bank
robbery,
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• 62 through 1500 are the exceptions
• provided in this subtitle.
• 62(a) General rule.
• For purposes of this subtitle, the term adjusted
  gross income means, in the case of an
  individual, gross income minus the following
  deductions
• Trade and business deductions
• Trade and business deductions of Employees.
• Reimbursed expenses of employees. The deductions
  allowed by part VI ( section 161 and following)
  which consist of expenses paid or incurred by the
  taxpayer, in connection with the performance by
  him of services as an employee, under a
  reimbursement or other expense allowance
  arrangement with his employer. ..
• Certain expenses of performing artists
• Certain expenses of officials
• Certain expenses of elementary and secondary
  school teachers...
• Certain expenses of members of reserve
  components of the Armed Forces of the United
  States

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• (Reg. 1.62-2(c)(1))
• An Accountable Plan is a reimbursement or other
  expense allowance arrangement that
• provides advances, allowances or reimbursements
  only for business expenses allowable as itemized
  deductions that are paid or incurred by the
  employee in connection with services as an
  employee the business connection requirement
  (see Reg. 1.62-2(d) )
• requires that the employee substantiate each
  business expense to the payor (see Reg.
  1.62-2(e) ) and
• requires the employee to return to the payor,
  within a reasonable time, any amount paid under
  the arrangement in excess of the expenses
  substantiated. ( Reg. 1.62-2(f) )
• The payor of the reimbursement, advance or
  allowance may be an employer, the employer's
  agent or some third party. ( Reg. 1.62-2(b) )
  (See FTC 2d/FIN L-4700 et seq. United States
  Tax Reporter 624.02 TaxDesk 29,600 et seq.
  TG 17800 et seq.)

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274 and Regulations Substantiation of Reimbursed
Employee Expenses, Whats Allowed

• Taxpayers must substantiate, by adequate records,
  the following types of expenses in order for them
  to be deductible
• travel expenses, including the cost of meals and
  lodging while away from home
• expenses required for your job, including
  uniforms, books, training, desks, computer,
  printer, chair, files, cabinets, etc.
• entertainment, amusement or recreation expenses,
  and expenses relating to facilities used for
  these activities
• the cost of business gifts or
• expenses relating to any listed property
  (including cars). (Code Sec. 274(d))
• Estimates made under the Cohan rule for these
  expenditures are not deductible. (Reg.
  1.274-5(a) Reg. 1.274-5T(a))

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Substantiation of Reimbursed Employee Expenses,
No Estimates The substantiation requirements
for travel, entertainment, gift and listed
property apply to all of a taxpayer's claimed
business travel and entertainment expenses. The
Tax Court rejected taxpayer's argument that if he
satisfies the travel, entertainment, gift and
listed property substantiation requirements for
some expenses, the court could use the Cohan Rule
to estimate additional allowable business travel
and entertainment expenses. (Brain, Irving Jr.,
(1990) TC Memo 1990-35 , PH TC Memo 90035 , 58
CCH TCM 1249 )
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Substantiation of Reimbursed Employee Expenses,
Business Purpose

• No deduction is allowed for away-from-home travel
  expenses, entertainment expenses, business gifts
  or listed property (including cars) expenses
  unless the taxpayer substantiates each of the
  following elements for every separate
  expenditure
• amount of the expense, or item
• time and place of travel, entertainment,
  amusement, etc.
• date and description of business gifts
• business purpose of the expense or item
• business relationship to taxpayer of each person
  entertained or receiving a gift.
• ( Code Sec. 274(d) Reg. 1.274-5(b)(2) Reg.
  1.274-5T(b)(2) )

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Substantiation of Reimbursed Employee Expenses,
cont

• If a plan reimburses business expenses that are
  not travel, entertainment, gift or listed
  property expenses, sufficient information must be
  submitted to the payor to enable the payor to
  identify the specific nature of each expense and
  to conclude that the expense is attributable to
  the payor's business activities.
• Therefore, each of the elements of an expenditure
  or use must be substantiated to the payor. It is
  not sufficient if an employee merely aggregates
  expenses into broad categories (such as travel)
  or reports individual expenses through the use of
  vague, nondescriptive terms (such as
  miscellaneous business expenses).
• ( Reg. 1.62-2(e)(3) )

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Substantiation of Reimbursed Employee Expenses,
Standards
Special deemed substantiation rules make it
easier for taxpayers to meet the substantiation
requirements as to the amount of the expenses
when the plan provides per diem or mileage
allowances. (Reg. 1.62-2(e)(2) ) For per diem
allowances for travel away from home and mileage
allowances for transportation expenses paid by
employers to employees.
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Substantiation of Reimbursed Employee Expenses,
No Documentation
Reimbursable expenses for which the employee
claims no reimbursement are not ordinary and
necessary business expenses of the employee.
Thus, if an employee pays travel expenses for
which he could have obtained reimbursement from
his employer, the expenses are not deductible by
the employee. Where a taxpayer is under no
obligation to make the expenditure and fails to
show that his employer would not reimburse him,
he can't deduct the expense.
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Substantiation of Reimbursed Employee Expenses,
Receipts
State of North Carolina State Budget
Manual Travel Policy

• Original (paid) receipts required for
• Airfare
• Airport shuttles (Max 5 w/o receipt)
• Taxis
• Parking, Tolls, Road fees
• Hotels
• Conference Registration fees
• Meals (Per diem allowed w/o receipt)
• Mileage (Standard allowed w/o receipt)
• Telephone Charges

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Substantiation of Reimbursed Employee Expenses,
Insufficient Documentation

• Regs. 1.62-2(c)
• (2) Accountable plans.
• In general. Except as provided in paragraph
  (c)(2)(ii) of this section, if an arrangement
  meets the requirements of paragraphs (d), (e),
  and (f) of this section, all amounts paid under
  the arrangement are treated as paid under an
  accountable plan.
• (3) Nonaccountable plans.
• (i) In general. If an arrangement does not
  satisfy one or more of the requirements of
  paragraphs (d), (e), or (f) of this section, all
  amounts paid under the arrangement are treated as
  paid under a nonaccountable plan. If a payor
  provides a nonaccountable plan, an employee who
  receives payments under the plan cannot compel
  the payor to treat the payments as paid under an
  accountable plan by voluntarily substantiating
  the expenses and returning any excess to the
  payor.

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Substantiation of Reimbursed Employee Expenses,
Insufficient Documentation Cont.
(4) Treatment of payments under accountable
plans. Amounts treated as paid under an
accountable plan are excluded from the employee's
gross income, are not reported as wages or other
compensation on the employee's Form W-2, and are
exempt from the withholding and payment of
employment taxes (5) Treatment of payments under
nonaccountable plans. Amounts treated as paid
under a nonaccountable plan are included in the
employee's gross income, must be reported as
wages or other compensation on the employee's
Form W-2, and are subject to withholding and
payment of employment taxes
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Accountable Plan, requirements

• (d) Business Connection
• (e) Substantiation
• (f) Reconciliation, returning excess
• Reasonable Period (some flexibility, NC 30
  days)

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Student Travel

• Business Purpose required by employer
• Accountable Plan Rules.
• Match travel fund to wages fund
• Did the student get PAID to travel? 20 hr/week
  max.
• Travel without a business purpose
• Field trip rules will cover all group expenses
• Scholarship rules for individual payments
  (withholding)
• Athletic or Academic Team Travel - exempt

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Non-employee Travel

• Business Purpose would be deductible if self
  paid.
• Accountable Plan Rules, receipts, substantiation,
  timing.
• Cannot pay per diem, so roll it into the
  Honorarium
• W-9 for US Citizens and Residents
• W-8BEN for Foreign Nationals (dont pay F-2s,
  check status)
• Travel to a Symposium or Conference
• Pay group hotel, meals, activities.
• Avoid payments to individuals.
• 1099s if ALL accountable plan rules arent
  satisfied.

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Questions?