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Travel Expense Reimbursements – Business Deduction or Employee Compensation?

Written by Molly Waite, CPA, Tax Manager

Employers often send employees on work assignments outside of the state or county, particularly in the service industry. The tax treatment of an employer’s reimbursement of travel expenses depends on many factors including a company’s type of reimbursement plan.

There are two types of reimbursement plans:

  1. Accountable Plan – Requires an employee to provide proof of business connection, substantiation of expenses and return of excess advances. Reimbursements to employees that fully comply with an accountable plan are deductible as business expenses by the employer and not reported as income by the employee.
  2. Nonaccountable Plan – Plan fails to require an employee to provide proof of business connection, substantiation of expenses and return of excess advances. Under such a plan, the employer reports the entire amount of the costs reimbursed as taxable compensation on Form W-2 in boxes 1, 3 and 5. Taxes should be withheld the same as with regular compensation.

In addition to the basic plan type, there are many facts and circumstances that can impact the tax treatment of travel expense reimbursements, for example, an employee’s travel status under an accountable plan:

  • Temporary work assignment – Employment away from home in a single location that is realistically expected to last one year or less. The employee is considered to be in travel status and the reimbursement of travel expenses are deductible as business expenses by an employer.
  • Indefinite work assignment – Employment away from home in a single location that is realistically expected to last for more than a year. The employee is considered to not be in travel status and reimbursements are treated as made under a nonaccountable plan as the employee is considered to have relocated and no longer working away from home. Reimbursements are included in the employee’s compensation.

It is important for an employer to establish a formal written travel expense reimbursement plan for many reasons including to document the tax treatment for the employer and employee, consequences of plan violations, impact of breaks in service and impact of changes to length of assignment.

For further discussion regarding the tax treatment of your company’s travel expense reimbursements, please contact your GBQ tax advisor at 614.221.1120.