“Gross income” includes all items of value received by the employee. When an employee receives a reimbursement from their employer for business expenses incurred (i.e. airfare, meals, or lodging), the reimbursement payment technically constitutes gross income to the employee. However, a reimbursed employee business expense can be excluded from gross income if made pursuant to an “accountable plan” under which the employer requires the employee to substantiate all expenses and repay any amounts received in excess of the documented expenses. (IRS Treasury Regulation 1.62-2(c)).
In order to qualify as an “accountable plan,” the following tests must be met:
- reimbursements can only be made for business expenses incurred by the employee in connection with the performance of the employee’s duties;
- the plan must require employees to substantiate their expenses within a reasonable period of time (see below for a definition of “reasonable”); and
- the plan must require employees to repay any reimbursements which exceed substantiated expenses within a reasonable period of time (see below for a definition of “reasonable”).
If these tests are not met, the full amount of the reimbursement should be included in the employee’s income (although the employee may be entitled to offset this income by deducting the expenses on his or her personal tax return). (IRS Treasury Regulation 1.62-2(c)(5)).
The determination of a reasonable period of time will depend on the facts and circumstances. The IRS has set forth guidelines with item 2 and 3 above regarding “reasonable period of time”. In IRS Treasury Regulation 1.62-2(g)(2), the IRS has established “safe harbors” which can be used to ensure reasonableness. These safe harbors state that based upon a fixed date, an advance made within 30 days of when an expense is paid or incurred, an expense substantiated to the payer within 60 days after it is paid or incurred, or an amount returned to the payer within 120 days after an expense is paid or incurred will be treated as having occurred within a reasonable period of time.
Per System reimbursement policy (see Office of Budgets and Accounting’s Disbursement of Funds Guidelines), meal reimbursements are not required to be substantiated. Meals are reimbursed for actual expenses incurred up to a maximum per diem. The IRS allows per diems to qualify as part of an accountable plan when the IRS per diem tables are used.