UNC Fin Sys Workshop 3-26-2007
The University of North Carolina at Charlotte
Accountable Plans
Anne E. Davenport
Tax Manager, UNC Charlotte
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The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
Income
Income is governed under
§61 of the Internal Revenue Code
“Except as provided in this subtitle, gross income
means all income, from whatever source derived…”
…cash or noncash benefit …fringes, “found money”,
gambling, babysitting, raffles, lotteries, barters,
scholarships, gifts, housing, donations, eBay sales,
garage sale proceeds, embezzlement, bank
robbery,…
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The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
§62 through §1500 are the “exceptions”
provided in this subtitle.
§62(a) General rule.
For purposes of this subtitle, the term “adjusted gross income” means, in
the case of an individual, gross income minus the following deductions:
(1) Trade and business deductions…
(2) Trade and business deductions of Employees.
(A) Reimbursed expenses of employees. The deductions allowed by
part VI ( section 161 and following) which consist of expenses paid or
incurred by the taxpayer, in connection with the performance by him of
services as an employee, under a reimbursement or other expense
allowance arrangement with his employer. [..]
(B) Certain expenses of performing artists…
(C) Certain expenses of officials…
(D) Certain expenses of elementary and secondary school teachers...
(E) Certain expenses of members of reserve components of the Armed
Forces of the United States…
The University of North Carolina at Charlotte
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Office of the Controller
UNC Fin Sys Workshop 3-26-2007
(Reg. § 1.62-2(c)(1))
An Accountable Plan is a reimbursement or other
expense allowance arrangement that:
provides advances, allowances or reimbursements only for business
expenses allowable as itemized deductions that are paid or incurred by the
employee in connection with services as an employee: the business
connection requirement (see Reg. § 1.62-2(d) )
requires that the employee substantiate each business expense to the
payor (see Reg. § 1.62-2(e) ) and
requires the employee to return to the payor, within a reasonable time, any
amount paid under the arrangement in excess of the expenses
substantiated. ( Reg. § 1.62-2(f) )
The payor of the reimbursement, advance or allowance may be an
employer, the employer's agent or some third party. ( Reg. § 1.62-2(b) )
(See FTC 2d/FIN ¶ L-4700 et seq.; United States Tax Reporter ¶ 624.02;
TaxDesk ¶ 29,600 et seq.; TG ¶ 17800 et seq.)
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The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
§274 and Regulations
Substantiation of Reimbursed Employee Expenses,
What’s Allowed:
Taxpayers must substantiate, by adequate records, the following types of
expenses in order for them to be deductible:
travel expenses, including the cost of meals and lodging while away from home;
expenses required for your job, including uniforms, books, training, desks,
computer, printer, chair, files, cabinets, etc.
entertainment, amusement or recreation expenses, and expenses relating to
facilities used for these activities;
the cost of business gifts; or
expenses relating to any listed property (including cars). (Code Sec. 274(d))
Estimates made under the Cohan rule for these expenditures are not deductible.
(Reg. § 1.274-5(a) ; Reg. § 1.274-5T(a))
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The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
Substantiation of Reimbursed Employee
Expenses, No “Estimates”:
The substantiation requirements for travel, entertainment, gift and listed
property apply to all of a taxpayer's claimed business travel and
entertainment expenses. The Tax Court rejected taxpayer's argument
that if he satisfies the travel, entertainment, gift and listed property
substantiation requirements for some expenses, the court could use the
Cohan Rule to estimate additional allowable business travel and
entertainment expenses. (Brain, Irving Jr., (1990) TC Memo 1990-35 ,
PH TC Memo ¶90035 , 58 CCH TCM 1249 )
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The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
Substantiation of Reimbursed Employee
Expenses, Business Purpose:
No deduction is allowed for away-from-home travel expenses, entertainment
expenses, business gifts or listed property (including cars) expenses unless the
taxpayer substantiates each of the following elements for every separate
expenditure:
amount of the expense, or item;
time and place of travel, entertainment, amusement, etc.;
date and description of business gifts;
business purpose of the expense or item;
business relationship to taxpayer of each person entertained or receiving a
gift.
( Code Sec. 274(d) ; Reg. § 1.274-5(b)(2) ; Reg. § 1.274-5T(b)(2) )
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The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
Substantiation of Reimbursed Employee
Expenses, cont:
If a plan reimburses business expenses that are not travel, entertainment,
gift or listed property expenses, sufficient information must be submitted to
the payor to enable the payor to identify the specific nature of each
expense and to conclude that the expense is attributable to the payor's
business activities.
Therefore, each of the elements of an expenditure or use must be
substantiated to the payor. It is not sufficient if an employee merely
aggregates expenses into broad categories (such as travel) or reports
individual expenses through the use of vague, nondescriptive terms (such
as miscellaneous business expenses).
( Reg. § 1.62-2(e)(3) )
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The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
Substantiation of Reimbursed Employee
Expenses, Standards:
Special deemed substantiation rules make it easier for
taxpayers to meet the substantiation requirements as
to the amount of the expenses when the plan provides
per diem or mileage allowances. (Reg. § 1.62-2(e)(2) )
For per diem allowances for travel away from home
and mileage allowances for transportation expenses
paid by employers to employees.
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The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
Substantiation of Reimbursed Employee
Expenses, No Documentation:
Reimbursable expenses for which the employee claims no
reimbursement are not ordinary and necessary business
expenses of the employee.
Thus, if an employee pays travel expenses for which he
could have obtained reimbursement from his employer, the
expenses are not deductible by the employee.
Where a taxpayer is under no obligation to make the
expenditure and fails to show that his employer would not
reimburse him, he can't deduct the expense.
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The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
Substantiation of Reimbursed Employee
Expenses, Receipts:
State of North Carolina State Budget Manual
Travel Policy
Original (paid) receipts required for:
Airfare
Airport shuttles (Max $5 w/o receipt)
Taxis
Parking, Tolls, Road fees
Hotels
Conference Registration fees
Meals (Per diem allowed w/o receipt)
Mileage (Standard allowed w/o receipt)
Telephone Charges
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The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
Substantiation of Reimbursed Employee Expenses,
Insufficient Documentation:
Regs. §1.62-2(c)
(2) Accountable plans.
(i) In general. Except as provided in paragraph (c)(2)(ii) of this section, if an
arrangement meets the requirements of paragraphs (d), (e), and (f) of this
section, all amounts paid under the arrangement are treated as paid
under an “accountable plan.”
(3) Nonaccountable plans.
(i) In general. If an arrangement does not satisfy one or more of the
requirements of paragraphs (d), (e), or (f) of this section, all amounts paid
under the arrangement are treated as paid under a “nonaccountable
plan.” If a payor provides a nonaccountable plan, an employee who
receives payments under the plan cannot compel the payor to treat the
payments as paid under an accountable plan by voluntarily
substantiating the expenses and returning any excess to the payor.
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The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
Substantiation of Reimbursed Employee
Expenses, Insufficient Documentation: Cont.
(4) Treatment of payments under accountable plans. Amounts treated as
paid under an accountable plan are excluded from the employee's gross
income, are not reported as wages or other compensation on the employee's
Form W-2, and are exempt from the withholding and payment of employment
taxes
(5) Treatment of payments under nonaccountable plans. Amounts treated
as paid under a nonaccountable plan are included in the employee's gross
income, must be reported as wages or other compensation on the
employee's Form W-2, and are subject to withholding and payment of
employment taxes
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The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
Accountable Plan, requirements:
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(d)
Business Connection
(e)
Substantiation
(f)
Reconciliation, returning excess
(g)
Reasonable Period
(…some flexibility, NC = 30 days)
The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
Student Travel
Business Purpose – required by employer
Accountable Plan Rules.
Match travel fund to wages fund
Did the student get PAID to travel? 20 hr/week max.
Travel without a business purpose
Field trip rules will cover all group expenses
Scholarship rules for individual payments (withholding)
Athletic or Academic Team Travel - exempt
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The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
Non-employee Travel
Business Purpose – would be deductible if self paid.
Accountable Plan Rules, receipts, substantiation, timing.
Cannot pay per diem, so roll it into the Honorarium
W-9 for US Citizens and Residents
W-8BEN for Foreign Nationals (don’t pay F-2s, check status)
Travel to a Symposium or Conference
Pay group hotel, meals, activities.
Avoid payments to individuals.
1099s if ALL accountable plan rules aren’t satisfied.
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The University of North Carolina at Charlotte
Office of the Controller
UNC Fin Sys Workshop 3-26-2007
Questions?
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The University of North Carolina at Charlotte
Office of the Controller