Reimbursements for expenses like mileage can be taxable for employees depending on if your business has an accountable plan. Let's go over what an accountable plan is and the impact it can have on your business taxes.
An accountable plan is a system for handling your reimbursements or allowances for employees. It must satisfy the following requirements:
Let's say your employees use their personal cars for business reasons and you reimburse them for mileage. Let's look at a mileage reimbursement program that would fall under an accountable plan:
Sometimes, businesses dole out excess reimbursements. This is more common with advances rather than expense reports. For example, your business may give a traveling employee an advance for an upcoming business trip but the trip expenses are less than the advance.
Employees must return excess reimbursements within a reasonable amount of time if you want to fall under an accountable plan.
What's a "reasonable amount" of time? The IRS defines this as:
Not necessarily but it's helpful for taxes. If your reimbursements are part of an accountable plan, it's not considered taxable income for employees.
No, but you must have these records available if you ever face an audit. For most businesses, it's a good idea to keep clear records. This is useful if you ever face an IRS audit but it's also useful if you ever have a financial audit or want to apply for business loans.
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