Many of us are familiar with going on business trips, paying for our own lodging and meals, and save the receipts like our lives depended on them. Maybe it’s not as drastic as that, but surely getting our money back hinges on our HR department deeming these expenses as reimbursable expenses. These are the out-of-pocket costs you incur in the course of your job, such as buying raw materials, and photocopying, travel, entertainment, subsistence, or medical expenses.
When you run certain expenses as part of handling a job for a client, or on behalf of your company, or even in the course of running a personal business, you need to record them as revenue. In most cases, it’s hard to predict costs accurately until after they’re incurred. Many companies prefer to put policies in place that would see their employees pay for expenses themselves, record them, and have them reimbursed in the future.
Treading on the reimbursement ground, you will invariably walk into some thorny issues, though. For example, of late, companies have relieved their employees from having to pay up for expenses out-of-pocket. Instead, they entrusted them with company credit cards. One advantage can be seen in situations when the company cannot or will not make a prompt reimbursement.
Reimbursable Expenses – Types, Tricks, and How Tricks May Backfire
The most often-encountered reimbursable expenses is when an employee is traveling on business-related trips. However, there are other situations relating to work when the employee pays out-of-pocket and then seeks for refunding. More often than not, the employee needs to keep hold of a receipt and offer details on his/hers purchases.
The majority of companies have clear guidelines to let their employees know the extent of their reimbursement policies. Usually, the employee handbook clearly highlights them. They may include anything from a ticket to the opera or a restaurant bill as a strategy to court a client to attending a training course in a neighboring city.
Similarly, supply, day care, and medical expenses are subject to reimbursement, as determined by the company or organization’s policy. Below we’re going to deconstruct the out-of-pocket expenses and the IRS compliant employee reimbursement policies of your company.
We can’t stress this enough. Every company, nonprofit or government can dictate their own policies regarding the definition of a travel expense. For example, if you’re going out of town on business and your neighbors are not willing to feed your cat, then you’ll most likely take it with you. However, some hotels charge a pet fee which your company may not agree to cover.
Become familiar with your employer’s policies to know the limits of your reimbursable expenses. The usual travel costs include:
- Means of transportation, from flight tickets to fuel for the company car.
- Tips to bellhops, waiters, or the valet.
- Meals and drinks.
- Laundry and dry cleaning.
- Gym memberships, if we’re talking about prolonged trips.
Other incidentals that can hit the road unexpectedly could squeeze in the reimbursable expenses category, but you need to offer detailed explanations on why and how these incurred.
The Internal Revenue Service issues an annual standard mileage rate to calculate the reimbursable costs of operating a vehicle for business-related purposes. One thing to keep in mind is that the IRS mileage rate is “optional”. Unless the company aims at claiming a tax deduction for the costs of using a car, they can pay for the actual expenses according to their own established rates.
What are the actual reimbursable expenses of operating a business vehicle? If you’re asking about gas costs – which tend to be the main worry of both the employer and employee, then you’ll be happy to know these are most definitely reimbursable. Other costs include wear and tear, like repairs and maintenance.
This year, the standard mileage rates for the use of a car reflected a decrease compared to 2015. It dropped down from 57.5 cents to 54 cents per mile for business miles driven.
If the need to squeeze in a bit of entertainment to seal a deal would not have been acknowledged, the IRS and companies alike would not have included this category as a legitimate reimbursable expense. The fact is entertaining potential clients or customers is a prerequisite to a successful business. Paired with meal expenses, these are often packaged together.
Client entertainment on business trips, or buying lunch as part of a business meeting, are acceptable. That is, if the employee is not exceeding his/hers spending limits.
If accountability conditions are met, these expenses for the entertainment of business associates, customers, or even employees can then be deducted by the company or employer from tax fees.
The company needs to prove the following:
- That the entertainment was ‘ordinary and necessary’ for the business.
- That the business expense can pass the ‘direct’ or ‘associated test’. That means the company should be able to prove the event was held in a business setting (office or conference room). Or that the objective of the event related to business.
Either way, there’s a thin line on which the definition of entertainment expense makes a fine balancing act. This is the reason most companies have a very strict policy regarding it.
Unfortunately, you probably wouldn’t get away with ordering ‘your finest champagne and caviar, please’ and blame it on a client’s expensive tastes. Not all things under the sun fly with reimbursement policies.
Some companies offer health reimbursement arrangements, or HRA to offset healthcare costs. This entails you to receive medical treatment without having to pay income taxes on it. It’s also cheaper when getting health insurance because the company is putting some of the money in. Of course, the employer benefits as well since an HRA comes with a tax benefit.
Stick to the Reimbursement Policy. Or Else…
Or else, if you’ve tried to exploit the system, not only will the company resort to disciplinary measures. For one, you may find yourself jobless and penniless from all those unreimbursed out-of-pocket expenses. Secondly, unless those reimbursements stick to federal regulations, both you and your employer may suffer the consequences. The IRS will treat your expenses as income, so you’d have to pay taxes on them. And so would your employer.
In order to avoid confusion and subjectivity blurring the employer-employee agreement on what is reimbursable, the HR department should write the company’s policies, or ‘accountable plans’, in compliance with prescribed Treasury regulations.
Accountable plans follow a ground set of rules:
- Employees have to prove their expenses were ordinary and necessary in the interest of the business.
- All business expenses have to be substantiated within less than 60 days.
Granted, some reimbursable expenses may personally benefit you as the employee. After all, they are the result of performing your job. You can’t have a meal with a client and be expected to eat the complimentary crackers yourself. Ideally, somewhere in the middle, along the guidelines of a proper accountability plan, both you and your employer should meet and shake hands in agreement on the matter. For example, are you flying first class to that conference in Tampa?