Reimbursements This section explains what to do when you receive an advance or arereimbursed for any of the employee business expenses discussed in thispublication. If you received an advance, allowance, or reimbursement for yourexpenses, how you report this amount and your expenses depends onwhether the reimbursement was paid to you under an accountable plan ora nonaccountable plan. This section explains the two types of plans, how per diem and carallowances simplify proving the amount of your expenses, and the taxtreatment of your reimbursements and expenses. It also covers rulesfor independent contractors. No reimbursement.You are not reimbursed or given an allowance for your expenses ifyou are paid a salary or commission with the understanding that youwill pay your own expenses. In this situation, you have noreimbursement or allowance arrangement, and you do not have to readthis section on reimbursements. Instead, see Completing Forms2106 and 2106-EZ, later, for information on completingyour tax return. Reimbursement, allowance, or advance.A reimbursement or other expense allowance arrangement is a systemor plan that an employer uses to pay, substantiate, and recover theexpenses, advances, reimbursements, and amounts charged to theemployer for employee business expenses. Arrangements include per diemand car allowances. A per diem allowance is a fixed amount of daily reimbursement youremployer gives you for your lodging, meals, and incidental expenseswhen you are away from home on business. (The term "incidentalexpenses" is defined in chapter 1under Standard MealAllowance.) A car allowance is an amount your employer gives youfor the business use of your car. Your employer should tell you what method of reimbursement is usedand what records you must provide. Employers.If you are an employer and you reimburse employee businessexpenses, how you treat this reimbursement on your employee's FormW-2 depends in part on whether you have an accountable plan.Reimbursements treated as paid under an accountable plan, as explainednext, are not reported as pay. Reimbursements treated as paid undernonaccountable plans, as explained later, are reported as pay. SeePublication 15,Circular E, Employer's Tax Guide, forinformation on employee pay. Accountable Plans To be an accountable plan, your employer's reimbursement orallowance arrangement must include all three of the following rules. Your expenses must have a business connection -- thatis, you must have paid or incurred deductible expenses whileperforming services as an employee of your employer. You must adequately account to your employer for theseexpenses within a reasonable period of time. You must return any excess reimbursement or allowance withina reasonable period of time. "Adequate accounting" and "returning excess reimbursements"are discussed later. An excess reimbursement or allowance is any amount you are paidthat is more than the business-related expenses that you adequatelyaccounted for to your employer. See Returning ExcessReimbursements, later, for information on how to handle theseexcess amounts. The definition of reasonable period of time Linz apartment hotelsdepends onthe facts and circumstances of your situation. However, regardless ofthe facts and circumstances of your situation, actions that take placewithin the times specified in the following list will be treated astaking place within a reasonable period of time. You receive an advance within 30 days of the time you havean expense. You adequately account for your expenses within 60 daysafter they were paid or incurred. You return any excess reimbursement within 120 days afterthe expense was paid or incurred. You are given a periodic statement (at least quarterly) thatasks you to either return or adequately account for outstandingadvances and you comply within 120 days of thestatement. Employee meets accountable plan rules.If you meet the three rules for accountable plans, your employershould not include any reimbursements in your income in box 1 of yourForm W-2. If your expenses equal your reimbursement, you do notcomplete Form 2106. You have no deduction since your expenses andreimbursement are equal. TaxTip: If your employer included reimbursements in box 1 of your FormW-2 and you meet all three rules for accountable plans, ask youremployer for a corrected Form W-2. Accountable plan rules not met.Even though you are reimbursed under an accountable plan, some ofyour expenses may not meet all three rules. Those expenses that failto meet all three rules for accountable plans are treated as havingbeen reimbursed under a nonaccountable plan (discussed later). Reimbursement of nondeductible expenses.You may be reimbursed under your employer's accountable plan forexpenses related to that employer's business, some of which aredeductible as employee business expenses and some of which are notdeductible. The reimbursements you receive for the nondeductibleexpenses do not meet rule (1) for accountable plans, and they aretreated as paid under a nonaccountable plan. Example.Your employer's plan may reimburse you for travel expenses whileaway from home on business and also for meals when you work late atthe office, even though you are not away from home. The part of thearrangement that reimburses you for the nondeductible meals when youwork late at the office is treated as paid under a nonaccountableplan. TaxTip: The employer makes the decision whether to reimburse employeesunder an accountable plan or a nonaccountable plan. If you are anemployee who receives payments under a nonaccountable plan, you cannotconvert these amounts to payments under an accountable plan byvoluntarily accounting to your employer for the expenses andvoluntarily returning excess reimbursements to the employer. Adequate Accounting One of the three rules for an accountable plan is that you mustadequately account to your employer for your expenses. You adequatelyaccount by giving your employer documentary evidence of your travel,mileage, and other employee business expenses, such as receipts, alongwith either a statement of expense, an account book, a diary, or asimilar record in which you entered each expense at or near the timeyou had it. (See chapter 5.) You must account for all amounts you received from youremployer during the year as advances, reimbursements, or allowances.This includes amounts you charged to your employer by credit card orother method. You must give your employer the same type of records andsupporting information that you would have to give to the IRS if theIRS questioned a deduction on your return. You must pay back theamount of any reimbursement or other expense allowance for which youdo not adequately account or that is more than the amount for whichyou accounted. Per Diem and Car Allowances If your employer reimburses you for your expenses using a per diemor a car allowance, you can generally use the allowance as proof forthe amount of your expenses. A per diem or car allowance satisfies theadequate accounting requirements for the amount of your expenses onlyif all four of the following conditions apply. Your employer reasonably limits payments of your expenses tothose that are ordinary and necessary in the conduct of the trade orbusiness. The allowance is similar in form to and not more than thefederal rate (defined later). You prove the time (dates), place, and business purpose ofyour expenses to your employer (as explained in Table 4)within a reasonable period of time. You are not related to your employer (as defined underStandard Meal Allowance in chapter 1).If you are relatedto your employer, you must be able to prove your expenses to the IRSeven if you have already adequately accounted to your employer andreturned any excess reimbursement. If the IRS finds that an employer's travel allowance practicesare not based on reasonably accurate estimates of travel costs(including recognition of cost differences in different areas for perdiem amounts), you will not be considered to have accounted to youremployer. In this case, you must be able to prove your expenses to theIRS. The federal rate.The federal rate can be figured using any one of the followingmethods. For per diem amounts: The regular federal per diem rate. The standard meal allowance. The high-low rate. For car expenses: The standard mileage rate. five star hotel in PontaA fixed and variable rate (FAVR). TaxTip: For per diem amounts, use the rate in effect for the area where youstop for sleep or rest. Regular federal per diem rate.The regular federal per diem rate is the highest amount that thefederal government will pay to its employees for lodging, meals, andincidental expenses (or meals and incidental expenses only) while theyare traveling away from home in a particular area. The rates aredifferent for different locations. Your employer should have theserates available. (Employers can get Publication 1542,which gives therates in the continental United States for the current year.) The standard meal allowance.The standard meal allowance (discussed in chapter 1)is the federalrate for meals and incidental expenses (M&IE). The rate for mostareas of the United States is $30. Areas qualifying for higher ratesare listed in Appendix A in the back of this publication. You receive an allowance for meals and incidental expenses onlywhen your employer does one of the following. Provides you with lodging (furnishes it in kind). Reimburses you, based on your receipts, for the actual costof your lodging. Pays the hotel, motel, etc., directly for yourlodging. Does not have a reasonable belief that you had (or willhave) lodging expenses, such as when you stay with friends orrelatives or sleep in the cab of your truck. Computes the allowance on a basis similar to that used incomputing your compensation, such as number of hours worked or milestraveled. High-low rate.This is a simplified method of computing the federal per diem ratefor travel within the continental United States. It eliminates theneed to keep a current list of the per diem rate for each city. Under the high-low method, the per diem amount for travel during1999 is $185 (including $42 for M&IE) for certain high-costlocations. All other areas have a per diem amount of $115 (including$34 for M&IE). (Employers can get Publication 1542,which givesthe areas eligible for the $185 per diem amount under the high-lowmethod for all or part of the year.) Prorating the standard meal allowance on partial days oftravel.The standard meal allowance is for a full 24-hour day of travel. Ifyou travel for part of a day, such as on the days you depart andreturn, you must prorate the full-day M&IE rate. These rules applywhether your employer uses the regular federal per diem rate or thehigh-low rate. You can use either of the following methods to figure the federalM&IE for that day. Method 1: For the day you depart, add 3/4 of the standardmeal allowance amount for that day. For the day you return, add 3/4 of the standardmeal allowance amount for the preceding day. Method 2: Prorate the standard meal allowanceusing any method that you consistently apply and that is in accordancewith reasonable business practice. For example, an employer can treat2 full days of per diem (that includes M&IE) paid for travel awayfrom home from 9 a.m. of one day to 5 p.m. of the next day as being nomore than the federal rate. This is true even though a federalemployee would be limited to a reimbursement of M&IE for only 1 1/2 days of the federal M&IE rate. The standard mileage rate.This is a set rate per milethat you can use to compute your deductible car expenses. For 1999,the standard mileage rate is 32 1/2 cents a mile for allbusiness miles driven before April 1. The rate is 31 cents forbusiness miles driven after March 31. This rate is adjustedperiodically. Fixed and variable rate (FAVR).This is an allowance your employermay use to reimburse your car expenses. Under this method, youremployer pays an allowance that includes a combination of paymentscovering fixed and variable costs, such as a cents-per-mile rate tocover your variable operating costs (such as gas, oil, etc.) plus aflat amount to cover your fixed costs (such as depreciation (or leasepayments), insurance, etc.). If your employer chooses to use thismethod, your employer will request the necessary records from you. Reporting your expenses with a per diem or car allowance.If your reimbursement is in the form of an allowance received underan accountable plan, the following two facts affect your reporting. The federal rate. Whether the allowance or your actual expenses were more thanthe federal rate. The following discussions explain where to report your expensesdepending upon how the amount of your allowance compares to thefederal rate. Allowance LESS than or EQUAL to the federal rate.If your allowance is less than or equal to the federal rate, theallowance will not be included in box 1 of your Form W-2. You donot need to report the related expenses or the allowance on yourreturn if your expenses are equal to or less than the allowance. However, if your actual expenses are more than your allowance, youcan complete Form 2106 and deduct the excess amount on Schedule A(Form 1040). If you are using actual expenses, you must be able toprove to the IRS the total amount of your expenses and reimbursementsfor the entire year. If you are using the standard meal allowance orthe standard mileage rate, you do not have to prove that amount. Example 1.In April, Jeremy takes a 2-day business trip to Denver. The federalrate for Denver is $122 per day. As required by his employer'saccountable plan, he accounts for the time (dates), place, andbusiness purpose of the trip. His employer reimburses him $122 a day($244 total) for living expenses. Jeremy's living expenses in Denverare not more than $122 a day. Jeremy's employer does not include any of the reimbursement on hisForm W-2 and Jeremy does not deduct the expenses on his return. Example 2.In June, Matt takes a 2-day business trip to Boston. Matt'semployer uses the high-low method to reimburse employees. Since Bostonis a high-cost area, Matt is given an advance of $180 a day ($360total) for his lodging, meals, and incidental expenses. Matt's actualexpenses totaled $490. alberghi a FirenzeSince Matt's $490 of expenses are more than his $360 advance, heincludes the excess expenses when he itemizes his deductions. Mattcompletes Form 2106 (showing all of his expenses andreimbursements). He must also allocate his reimbursement between hismeals and other expenses as discussed later under CompletingForms 2106 and 2106-EZ. Example 3.Nicole drives 10,000 miles a year for business. Under heremployer's accountable plan, she accounts for the time (dates), place,and business purpose of each trip. Her employer pays her a mileageallowance of 20 cents a mile. Since Nicole's $3,137.50 ($812.50 + $2,325) expenses computedunder the standard mileage rate (2,500 miles 32 1/2 cents and 7,500 miles 31 cents) are more than her$2,000 reimbursement (10,000 miles 20 cents), she itemizes herdeductions to claim the excess expenses. Nicole completes Form 2106(showing all of her expenses and reimbursements) and enters$1,137.50 ($3,137.50 - $2,000) as an itemized deduction. Allowance MORE than the federal rate.If your allowance is more than the federal rate, your employer mustinclude the allowance amount up to the federal rate in box 13 of yourForm W-2. This amount is not taxable. However, the excessallowance will be included in box 1 of your Form W-2. You mustreport this part of your allowance as if it were wage income. If your actual expenses are less than or equal to the federal rate,you do not complete Form 2106 or claim any of your expenses on yourreturn. However, if your actual expenses are more than the federal rate,you can complete Form 2106 and deduct those excess expenses. You mustreport on Form 2106 your reimbursements up to the federal rate (asshown in box 13 of your Form W-2) and all your expenses. Youshould be able to prove these amounts to the IRS. Example 1.Laura lives and works in Austin. Her employer sent her toAlbuquerque for 2 days on business. Laura's employer paid the hoteldirectly for her lodging and reimbursed Laura $40 a day ($80 total)for meals and incidental expenses. Laura's actual meal expenses werenot more than the federal rate for Albuquerque, which is $38 per day. Her employer included the $4 that was more than the federal rate[($40 - $38) 2] in box 1 of Laura's FormW-2. Her employer shows $76 ($38 a day 2) in box 13 ofher Form W-2. This amount is not included in Laura's income.Laura does not have to complete Form 2106; however, she must includethe $4 in her gross income as wages (by reporting the total amountshown in box 1 of her Form W-2). Example 2.Joe also lives in Austin and works for the same employer as Laura.In May the employer sent Joe to San Diego for 4 days and paid thehotel directly for Joe's hotel bill. The employer reimbursed Joe $50 aday for his meals and incidental expenses. The federal rate for SanDiego is $46 a day. Joe can prove that his actual meal expenses totaled $290. Hisemployer's accountable plan will not pay more than $50 a day fortravel to San Diego, so Joe does not give his employer the recordsthat prove that he actually spent $290. However, he does account forthe time, place, and business purpose of the trip. This is Joe's onlybusiness trip this year. Joe was reimbursed $200 ($50 4 days), which is $16 morethan the federal rate of $184 ($46 4 days). The employerincludes the $16 as income on Joe's Form W-2 in box 1. Theemployer also enters $184 in box 13 of Joe's Form W-2. ERROR MSGJoe completes Form 2106 to figure his deductible expenses. Heenters the total of his actual expenses for the year ($290) on Form2106. He also enters the reimbursements that were not included in hisincome ($184). His total deductible expense, before the 50% limit, is$106. After he figures the 50% limit on his unreimbursed meals andentertainment, he will include the balance, $53, as an itemizeddeduction. Example 3.Debbie drives 10,000 miles for business. Under her employer'saccountable plan, she gets reimbursed 35 cents a mile, which is 2 1/2 cents a mile more than the standard mileage rate for2,000 miles and 4 cents more for the remaining 8,000 miles. Debbie's employer must include the reimbursement amount up to thestandard mileage rate, $3,130 (2,000 miles 32 1/2cents and 8,000 miles 31 cents), in box 13 of her FormW-2. That amount is not taxable. Her employer must also include$370 (2,000 miles 2 1/2 cents and 8,000 miles 4 cents) in box 1 of her Form W-2. This is thereimbursement that is more than the standard mileage rate. If Debbie's expenses are equal to or less than the standard mileagerate, she would not complete Form 2106. If her expenses are more thanthe standard mileage rate, she would complete Form 2106 and report hertotal expenses and reimbursement (shown in box 13 of her FormW-2). She would then claim the excess expenses as an itemizeddeduction. Returning Excess Reimbursements Under an accountable plan, you are required to return any excessreimbursement or other expense allowances for your business expensesto the person paying the reimbursement or allowance. Excessreimbursement means any amount for which you did not adequatelyaccount within a reasonable period of time. For example, if youreceived a travel advance and you did not spend all the money onbusiness-related expenses, or you do not have proof of all yourexpenses, you have an excess reimbursement. Table 5. Reporting Travel, Entertainment, Gift and Car Expenses and Reimbursements "Adequate accounting" and "reasonable period of time"were discussed earlier in this chapter. Travel advance.You receive a travel advance if your employer provides you with anexpense allowance before you actually have the expense, and theallowance is reasonably expected to be no more than your expense.Under an accountable plan, you are required to adequately account toyour employer for this advance and to return any excess within areasonable period of time. If you do not adequately account for or do not return any excessadvance within a reasonable period of time, the amount you do notaccount for or return will be treated as having been paid under anonaccountable plan (discussed later). Unproved amounts.If you do not prove that you actually traveled on each day forwhich you received a per diem or car allowance (proving the elementsdescribed in Table 4), you must return this unproved amountof the travel advance within a reasonable period of time. If you donot do this, the unproved amount will be considered paid under anonaccountable plan (discussed later). Per diem allowance MORE than federal rate.If your employer's accountable plan pays you an allowance that ishigher than the federal rate, you do not have to return the differencebetween the two rates for the period you can prove business-relatedtravel expenses. However, the difference will be reported as wages onyour Form W-2. This excess amount is considered paid under anonaccountable plan (discussed later). Example.Your employer sends you on a 5-day business trip to Phoenix andgives you a $225 ($45 5 days) advance to cover your meals andincidental expenses. The federal per diem for meals and incidentalexpenses for Phoenix is $38. Your trip lasts only 3 days. Under youremployer's accountable plan, you must return the $90 ($45 2days) advance for the 2 days you did not travel. You do not have toreturn the $21 difference between the allowance you received and thefederal rate for Phoenix [($45 - $38) 3 days].However, the $21 will be reported on your Form W-2 as wages. Nonaccountable Plans A nonaccountable plan is a reimbursement or expense allowancearrangement that does not meet one or more of the three rules listedearlier under Accountable Plans. In addition, even if your employer has an accountable plan, thefollowing payments will be treated as being paid under anonaccountable plan: Excess reimbursements you fail to return to your employer,and Reimbursement of nondeductible expenses related to youremployer's business. See Reimbursement of nondeductible expensesearlier under Accountable Plans. An arrangement that repays you for business expenses byreducing the amount reported as your wages, salary, or other pay willbe treated as a nonaccountable plan. This is because you are entitledto receive the full amount of your pay whether or not you have anybusiness expenses. If you are not sure if the reimbursement or expense allowancearrangement is an accountable or nonaccountable plan, ask youremployer. Reporting your expenses under a nonaccountable plan.Your employer will combine the amount of any reimbursement or otherexpense allowance paid to you under a nonaccountable plan with yourwages, salary, or other pay. Your employer will report the total inbox 1 of your Form W-2. You must complete Form 2106 or 2106-EZ and itemize yourdeductions to deduct your expenses for travel, transportation, meals,or entertainment. Your meal and entertainment expenses will be subjectto the 50% limit discussed in chapter 2.Also, your total expenseswill be subject to the 2%-of- adjusted-gross-income limit that appliesto most miscellaneous itemized deductions. Example 1.Kim's employer gives her $500 a month ($6,000 total for the year)for her business expenses. Kim does not have to provide any proof ofher expenses to her employer, and Kim can keep any funds that she doesnot spend. Kim is being reimbursed under a nonaccountable plan. Her employerwill include the $6,000 on Kim's Form W-2 as if it were wages.If Kim wants to deduct her business expenses, she must complete Form2106 or 2106-EZ and itemize her deductions. Example 2.Kevin is paid $2,000 a month by his employer. On days that hetravels away from home on business, his employer designates $50 a dayof his salary as paid to reimburse his travel expenses. Because hisemployer would pay Kevin his monthly salary whether or not he wastraveling away from home, the arrangement is a nonaccountable plan. Nopart of the $50 a day designated by his employer is treated as paidunder an accountable plan. Rules for Independent Contractors and Clients This section provides rules for independent contractors who incurexpenses on behalf of a client or customer. The rules cover thereporting and substantiation of certain expenses discussed in thispublication, and they affect both independent contractors and theirclients or customers. You are considered an independent contractor if you areself-employed and you perform services for a customer or client. Accounting to Your Client If you received a reimbursement or an allowance for travel,entertainment, or gift expenses that you incurred on behalf of aclient, you should provide an adequate accounting of these expenses toyour client. If you do not account to your client for these expenses,you must include any reimbursements or allowances in income. You mustkeep adequate records of these expenses whether or not you account toyour client for these expenses. If you do not separately account for and seek reimbursement formeals and entertainment in connection with providing services for aclient, you are subject to the 50% limit on those expenses. See50% Limit in chapter 2. Adequate accounting.As a self-employed person, you adequately account by reporting youractual expenses. You should follow the recordkeeping rules in chapter 5. How to report.For information on how to report expenses on your tax return, seeSelf-employed at the beginning of this chapter. Required Records forClients or Customers If you are a client or customer, you generally do not have to keeprecords to prove the reimbursements or allowances you give, in thecourse of your business, to an independent contractor for travel orgift expenses incurred on your behalf. However, you must keep recordsif: You reimburse the contractor for entertainment expensesincurred on your behalf, and The contractor adequately accounts to you for theseexpenses. casinos jeux GuideContractor adequately accounts.If the contractor adequately accounts to you for entertainmentexpenses, you (the client or customer) must keep records documentingeach element of the expense, as explained in chapter 5.Use yourrecords as proof for a deduction on your tax return. If entertainmentexpenses are accounted for separately, you are subject to the 50%limit on entertainment. If the contractor adequately accounts to youfor reimbursed amounts, you do not have to report the amounts on aninformation return. Contractor does not adequately account.If the contractor does not adequately account to you for allowancesor reimbursements of entertainment expenses, you do not have to keeprecords of these items. You are not subject to the 50% limit onentertainment in this case. You can deduct the reimbursements orallowances as payment for services if they are ordinary and necessarybusiness expenses. However, you must file Form 1099-MISC,Miscellaneous Income, to report amounts paid to theindependent contractor if the total of the reimbursements and anyother fees is $600 or more during the calendar year.