Tax Tip from the week of July 14, 2008

Review your employee reimbursement policy

Do you have a policy for reimbursing employees who incur business expenses such as travel, meals, professional dues, and continuing education?

If not, you may be missing out on tax benefits. That's because the way you repay out-of-pocket business expenses can determine whether the money is considered taxable compensation — or a nontaxable reimbursement.

One way to achieve the more favorable result is to establish an accountable reimbursement plan. This type of plan lets you deduct reimbursements on your business tax return, while exempting them from payroll taxes. In addition, your employees can exclude the reimbursed amount from income.

Setting up a plan involves creating written procedures and making sure the reimbursements satisfy three main conditions:

1. The expense must have a business connection. Generally, you can reimburse your employees for deductible business expenses they incur while performing services for your business.
   
   
2. The expense must be supported by adequate records. The substantiation you need to keep depends on the type of expense. As an example, for meal reimbursements you'll want receipts detailing the date, the customer or client, the amount spent, and the business purpose.
   
   
3. Overpayments must be returned within a reasonable time. Your employees must pay back any amounts you advance in excess of actual substantiated expenses.

Complying with tax code requirements will keep your accountable reimbursement plan tax-free. If you need help reviewing your existing plan or setting up a new one, please give us a call.