Jitasa Nonprofit Blog

Jitasa Educational Series: Employee Expense Reimbursement Plans

Many business expenses of nonprofits are paid directly by the nonprofit to its various vendors. Additionally, nonprofits will also incur indirect expenses.  Often times, these indirect expenses are initially paid by an employee who is later reimbursed by the nonprofit.  Whether or not the reimbursement to the employee is taxable or not depends upon whether your nonprofit has created, implemented, and maintained a proper accountable reimbursement plan.

In this blog series, we will examine:

1. The requirements for setting up an IRS approved accountable reimbursement plan
2. Questions to help your nonprofit set up the right plan as well as some best practices
3. The importance of the partnership between senior management and finance / accounting department in creating and maintaining an accountable expense reimbursement plan.

Lets get started.

Part I – Employee Expense Reimbursement Plans: IRS Requirements

In order to reimburse an employee for a business expense without causing the employee to incur taxable income, your nonprofit will need to set up an accountable expense reimbursement plan.

An accountable expense reimbursement plan must meet all three requirements:

1. Business connection.  Expense incurred is for a legitimate organizational expense
2. Adequately account for expenses to employer within a reasonable period of time
3. Return of any excess reimbursement or allowance in a reasonable period of time

Failure to meet any one of these requirements will result in the expense to be categorized as compensation to the employee, which the employer will need to report on the employee’s W-2 (Box 1 on the form).

Let’s take a look at these three requirements in more detail.

Requirement: Business Connection & Adequate Documentation

In order to meet the business connection and adequately account for expenses requirements, proper documentation is needed.  Anyone who has ever filled out an expense report knows that this can be burdensome and time consuming.  As a rule of thumb, the following will satisfy the IRS:

Business Purpose.  Why the expense should be considered an organizational expense
Description of Expense
Names and Location of those for whom the expense was incurred.  This is primarily for travel,           meals, and entertainment related reimbursements.
Amount
Date Expense Incurred

Requirement: Reasonable Period

The reasonable period of time language is a bit ambiguous and allows for some flexibility based upon individual situations.  The following methods meet the reasonable time definition.

1. Fixed Date Method
An advance is given within 30 days of when an expense is incurred or paid
An expense is adequately accounted for to the employer within 60 days
Any excess reimbursements are returned within 120 days of the expense

2. Periodic Statement Method (can be used when) the employer provides a periodic statement (at least quarterly) that requires an employee to return or substantiate any outstanding advances within 120 days of the statement

Allowances not based on actual expenses, excess reimbursements over IRS mileage rates, excess per diem allowance more than the federal rate, and the retention of unused advances and/or excess reimbursements fall under the non-accountable plan category and must be reported as employee income.

Please join us on Thursday, May 9th for part 2 of our series as we discuss best practices as your nonprofit creates it Accountable Expense Reimbursement Policy.

James Strombeck, Director of Delivery Support Team, Jitasa

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