Question

In: Accounting

Does your employer offer an accountable or non-accountable plans for employee business expenses? Do you agree...

Does your employer offer an accountable or non-accountable plans for employee business expenses? Do you agree with the method? Provide support four your rationale.   If you are unsure of the type of plan your company has, would you suggest an accountable or non-accountable plan. Provide support for your rationale.

Solutions

Expert Solution

This letter explains the tax consequences of an employee reimbursement either under an employer’s accountable plan or nonaccountable plan.

In general, employee expenses reimbursed under an employer’s accountable plan are not considered income to the employee for federal income tax purposes. In contrast, employee expenses reimbursed under a nonaccountable plan are considered income to the employee and are subject to withholding.

An accountable plan is a reimbursement or other expense allowance arrangement that satisfies three basic requirements: a business connection; substantiation; and return of excess amounts. The requirements of an accountable plan are applied on an employee-by-employee basis.

To satisfy the business connection component, the business expenses covered by the plan: (1) must satisfy the requirements for deduction as business expenses; and (2) must be paid or incurred by the employee in connection with the performance of services as an employee. Allowances under the plan may include per diem allowances, allowances for meals and incidental expenses, and mileage allowances.

To satisfy the substantiation component, an accountable plan must require employees to furnish adequate substantiation of reimbursed expenses to the employer or other payer. The specific type of substantiation required under an accountable plan depends on the nature of the reimbursed expense, but in any case must be done in a reasonable amount of time. Certain types of expenditures are covered by other special rules. Such expenditures include: (1) travelling expenses, including meals and lodging while away from home; (2) any item with respect to an activity that is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such an activity; (3) gifts; and (4) expenses with respect to any “listed property.” Other than the aforementioned expenses, substantiation is adequate if the information furnished to the employer is sufficient to identify the specific nature of each expense and to show that the expense is attributable to the employer’s business activities.

To satisfy the return of excess amounts component, the arrangement must require an employee to return to the employer within a reasonable period of time any amount that exceeds the employee’s properly substantiated expenses. If the arrangement contains the requisite provision for return of excess amounts, but an employee fails to return amounts received in excess of substantiated expenses within a reasonable period, the amounts paid to the employee that exceed the properly substantiated expenses are treated as paid from a nonaccountable plan. Special rules apply when an arrangement provides per diem allowances for ordinary and necessary business expenses of travelling away from home (excluding transportation costs to and from the destination) or mileage allowances for ordinary and necessary expenses of local transportation or travel away from home.

An arrangement between an employer and employee for advances, allowances, or reimbursement of business expenses that does not satisfy one or more of the three basic requirements of an accountable plan is treated as a nonaccountable plan

For tax purposes, 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 (Federal Insurance Contributions Act (“FICA”), Federal Unemployment Tax Act (“FUTA”), Railroad Retirement Tax Act (“RRTA”), and Railroad Unemployment Repayment Tax (“RURT”)), and income tax. They are instead deductible as business expenses by the employer, subject to any limitations on the deduction of the particular type of expense. Note that there are exceptions to this rule for expenses that are either more or less than the reimbursed amounts.

When an employee’s expenses are allowed or reimbursed under a nonaccountable plan, the employer must report the amounts paid under the plan as wages on the employee’s W-2 Form. Moreover, such amounts are subject to withholding and to the payment of employment taxes, such as FICA, FUTA, RRTA, and RURT. Amounts paid under a nonaccountable plan are included in the employee’s gross income. Expenses attributable to amounts included in gross income are deductible by the employee, subject to all applicable limitations.


Related Solutions

What types of employer conduct with respect to unions does the law prohibit? Do you agree...
What types of employer conduct with respect to unions does the law prohibit? Do you agree with these prohibitions?
Business plans enable entrepreneurs to achieve their goals”. To what extent do you agree with this...
Business plans enable entrepreneurs to achieve their goals”. To what extent do you agree with this statement?
Business plans enable entrepreneurs to achieve their goals”. To what extent do you agree with this...
Business plans enable entrepreneurs to achieve their goals”. To what extent do you agree with this statement?
"Sponsoring Employee Compensation Plans" Imagine that you are an employer trying to decide whether to sponsor...
"Sponsoring Employee Compensation Plans" Imagine that you are an employer trying to decide whether to sponsor a “qualified” retirement plan or “nonqualified” deferred compensation plan for your employees. What are the tax and nontax consequences of each plan? Based on what you know about the different plans, what would be your justification for selecting the one you choose?
For a global business, organizational structure is not important. Do you agree or disagree? Defend your...
For a global business, organizational structure is not important. Do you agree or disagree? Defend your answer.
Do you agree the employer usually has the upper hand when it comes to establishing the...
Do you agree the employer usually has the upper hand when it comes to establishing the employment relationship? Why might the employee have maximum power over the employer?
Could someone please offer some insight on your company's policy? My employer do not have this...
Could someone please offer some insight on your company's policy? My employer do not have this type of policy in place Assignment: Research the withdrawal or detoxification management policy or procedures at their place of employment. If one is not available, ask students to review the policy of a local health-care setting of their choice. What nursing interventions are present in this policy or procedure? Summarize your findings
Is bluffing in business ethical? Summarize Carr’s argument. Do you agree with him? Does bluffing pass...
Is bluffing in business ethical? Summarize Carr’s argument. Do you agree with him? Does bluffing pass Hooker’s generalization test in poker? Does it pass the generalization test in business? Discuss.
1)As an employee list 8 expectations you have from your employer 2)As am employer list 8...
1)As an employee list 8 expectations you have from your employer 2)As am employer list 8 expectation you would have of your employee 3)What is considered Full Time Hours in Canada and Japan? 4)What is considered Part Time Hours in Canada and Japan? 5)What would you do if you felt something was unsafe at work? 150 words
An employer is hiring a new employee and wants to ensure that the new hire does...
An employer is hiring a new employee and wants to ensure that the new hire does not have embarrassing, illegal, or inappropriate postings on Facebook. To qualify for the position, applicants are required to share their Facebook login and password with employer. Is this legal in Oklahoma? Elaborate in your response - please do not give me a yes or not answer. Do all states prohibit this conduct? What is your opinion on Oklahoma law?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT