Not long ago, the IRS released Revenue Ruling 2012-25, which serves as a reminder of the rules to employers whose accountable reimbursement plans may have fallen out of compliance. The ruling largely focuses on the “business connection” requirement.
Specifically, the IRS clarifies that an arrangement that re-characterizes taxable wages as nontaxable reimbursements or allowances does not satisfy the business connection requirement of the accountable plan rules. According to the agency, an employer re-characterizes wages if it:
- Temporarily reduces taxable wages and substitutes nontaxable reimbursements until total expenses have been reimbursed and then increases wages to the previous level.
- Pays a higher amount as wages to an employee when he or she doesn’t receive a nontaxable reimbursement, and a lower amount as wages when the employee also receives a nontaxable reimbursement.
- Routinely pays a nontaxable reimbursement to an employee who hasn’t incurred bona fide business expenses.
The guidance also illustrates how Revenue Ruling 2012-25 may be applied to various types of employers. (Ask your tax advisor for help fully interpreting it.)
Despite apparent complications, accountable plans are indeed a good thing. Reimbursements aren’t reported as income, so you should be able to avoid payroll taxes and W-2 reporting while claiming deductions for these expenses. Meanwhile, employees don’t have to report reimbursements as income or claim the expenses as miscellaneous itemized deductions. The tricky part, of course, is following the rules.