J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

20.31 Tax Treatment of Reimbursements

Compliance rules are imposed on employees and employers for reporting reimbursed travel and entertainment expenses in order to prevent reimbursement arrangements from being used to avoid the 2% of adjusted gross income (AGI) floor for employee miscellaneous expenses. Plans that allow reimbursements that do not comply with the IRS rules are called non-accountable plans. All reimbursements under a non-accountable plan are reported as salary or wage income on Form W-2. You then deduct your expenses as miscellaneous deductions subject to the 2% AGI floor (20.35).

If a plan meets the IRS rules, the plan is called an accountable plan and reimbursements made by the plan are not reported on Form W-2 as taxable wages. You also do not have to deduct expenses, assuming the reimbursement equals your expenses. In other words, there is a bookkeeping “wash” in which the full amount of expenses offsets the reimbursement without being reduced by the 2% AGI floor, and in the case of meal and entertainment costs, by the 50% reduction. Even though the employer may only deduct 50% of qualifying meal and entertainment expenses, you are not taxed on any part of a reimbursement of such costs if the accountable plan rules are met.

To qualify a plan as accountable, your employer must see to it that you submit adequate proof of your expenditures, and that you return any excess advances (20.32). To reduce record-keeping for actual costs, the company may reimburse you ...