Creating a Reimbursed Employee Business and Travel Expense Program
Employees can no longer deduct unreimbursed business or travel expenses because the Tax Cuts and Jobs Act and the later OBBBA permanently removed miscellaneous itemized deductions. The practical solution is for the employer to reimburse those costs under a written accountable plan. This keeps the payment tax-free to the employee and fully deductible by the business.
Why a reimbursement program is needed
Before the law changes, employees sometimes claimed travel, meals, mileage, and other work costs on Schedule A. That approach is no longer available. If the business does not reimburse these expenses, the employee simply bears the cost. A reimbursement program moves the deduction back to the business, where it belongs.
What an accountable plan is
An accountable plan is a reimbursement arrangement that meets the requirements in Treasury Regulation §1.62-2. If the plan meets those rules, the reimbursement is not wages, is not reported on Form W-2, and is deductible by the business.
An accountable plan must have all three of the following:
- Business connection. The expense must be for the employer’s business. Travel to a client, mileage to a job site, professional dues, and required education are examples.
- Substantiation. The employee must provide receipts or records that show the amount, date, place, and business purpose. This should be done within a reasonable period, typically 60 days.
- Return of excess. If the employer advances more than the employee spent, the employee must return the excess within a reasonable period, typically 120 days.
If any of these elements are missing, the payment becomes taxable wages.
What the policy should say
A good reimbursement program is written. It tells employees what they can submit, when they must submit it, and what proof is required. At a minimum, the policy should cover:
- Which expenses are reimbursable (travel, lodging, mileage, local business transportation, client meals subject to the 50 percent rule, professional dues, required licenses)
- Expenses that are not reimbursable (personal trips, commuting from home to the regular work location, family travel)
- Documentation requirements (receipts, mileage logs, purpose of the trip)
- Submission deadline (for example, within 60 days of the expense)
- Process for returning any excess advance
How to handle travel and mileage
Travel, lodging, and business mileage are the most common employee expenses. The policy can allow either actual expenses with receipts or business mileage using the IRS standard mileage rate for the year. Whatever method is chosen must be documented the same way for all employees.
How to record the payments
Reimbursements under an accountable plan should not be mixed with payroll. Pay them through accounts payable or a separate reimbursement line. Do not include them in Box 1 of Form W-2. In the business books, the amounts are ordinary and necessary business expenses.
Linking this to current case law
The Tax Court memorandum in Sohail S. Hussaini v. Commissioner: When W-2 Employees Cannot Deduct Travel Expenses shows what happens when an employee pays for travel but has no reimbursement arrangement. The Court denied the deduction because current law does not allow unreimbursed employee business expenses. A written reimbursement program avoids that result.
For owners and partners
If owners, partners, or shareholders are paying company expenses personally, that should also be addressed. See Should Owners and Partners Pay Company Expenses Out of Pocket? for how to handle those costs properly. In many cases it is better for the entity to reimburse the expense under a policy rather than leave it on the owner.
Call to action
If your employees or owners are paying for business travel, client meetings, or professional costs with no reimbursement, that is now an avoidable loss. I prepare accountable plan policies that meet IRS rules, set reasonable timing standards, and keep reimbursements tax-free. Contact me to have your reimbursement program drafted or reviewed.
