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J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line by Barbara Weltman

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Reimbursement Arrangements

If an employer reimburses an employee for travel and entertainment expenses, how you arrange the reimbursement affects what the employer and employee can deduct.

No Reimbursement Arrangement

If an employee on salary has no reimbursement arrangement and is expected or required to pay for travel and entertainment costs by himself or herself, the employee can deduct the expenses on his or her individual income tax return. The business expenses are deductible as miscellaneous itemized deductions. This means that after applying all the limits discussed above, such as the 50% limit on meals and entertainment, costs are deductible only to the extent they exceed 2% of the employee’s adjusted gross income. In this instance, the employee is responsible for recordkeeping of business expenses.

Accountable Plans

If an employer maintains an accountable plan, the employee does not deduct any expenses. Instead, the employer pays for and deducts all costs. No reimbursements are reported as income to the employee, and the reimbursements are not subject to payroll taxes.

A reimbursement arrangement is treated as an accountable plan if:

  • The expenses have a business connection. This means the expenses must have been incurred while performing services as an employee for an employer.
  • The employee must adequately account to the employer for expenses within a reasonable time. Accounting within 60 days after paying or incurring the expenses is considered a reasonable time. The ...

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