When is an expense reimbursement not taxable?
Not every expense reimbursement is tax-free. Everything received is taxable unless there is an exception or exclusion. The exception that most often is used to exclude expense reimbursements is for a business expense reimbursement. Whether the business expense reimbursement is available depends upon the facts and circumstances of each case. Even with a receipt, the expense, in the eyes of the payee, has to be a tax deductible expense and meet the requirements of an IRS accountable plan.
Tax Deductible Expense for the Payee
To meet the tax deductible requirement, look at whether the expense is tax deductible for the payee. Often it is difficult to tell with the information provided to accounts payable because the individual is both a student and an employee. Is the travel related to their employment at Kent State? Or is it primarily for the education of the student and preparing the student to obtain the first career in the field? The situations range for the obvious - the full-time tax manager with a CPA license and masters in tax who attends a tax conference to the less clear graduate assistant who presents on research at a three-day conference to the graduate student (non graduate assistant) who presents a paper at the same three-day conference as the graduate assistant. Often the research is used both to obtain the degree and for the benefit of the research conducted by the university. If the graduate assistant was going to present research and not attending the entire conference then the business purpose is clear. When attending conferences, all of the following criteria must be met:
- Individual must attend the conference in connection with the performance of services for the university AND
- One of the following criteria must be met:
- The education must maintain or improve skills related to rendering services at Kent State. The education cannot be required to get into the field (as opposed to staying in the field) or qualify the employee for a new line of work OR
- The education is required (by law or in a job description) to keep the position or job with Kent State.
- The accountable plan rules must be met.
When there is a symposium or a speaker brought on campus to give a lecture to the university community, payment is not required but expense reimbursements are made and there might be an honorarium. Guest speakers are rendering services to the university even if they are not required to be paid. In this case, if there is only an expense reimbursement for hotel, transportation (airfare, taxi, tolls, etc.) and meal per diem (at the IRS rate), then the expenses are business expenses. If there is an honorarium, there needs to be HR approval of the relationship before finalizing the agreement with the individual. Even if there isn't an honorarium, the facts and circumstances have to meet the requirements for HR approval as an independent contractor.
Another situation seen frequently is when a visiting professor "collaborates" in a Kent State research lab. This seems like the same situation as a guest speaker but the difference is a guest speaker is allowed to render services as an independent contractor but researchers in most cases are not. The visiting professor may want funds to pay for transportation, housing and meals while here so it is agreed that a stipend will be paid for housing and pay for meals. There are several issues with this scenario: is this really compensation for services? Or is considered a fellowship in the case of self directed research? Often the visiting researcher is already in the field and is being compensated by his or her employer already so it looks like a business expense reimbursement while being away from the normal workplace (less than one year) however a reimbursement to the individual is also considered a non-service scholarship/fellowship. While a fellowship or scholarship is not reported to the IRS, when the individual is a nonresident alien there may be payment limitations because of the VISA status. Even if there are no payment limitations, there could be tax reporting required and unless there is a tax treaty and the individual has a US tax identification number, tax withholding will be required.
IRS Accountable Plan
In order to be reimbursed without taxation for expenses, there needs to be an accountable plan. To be paid under an accountable plan, the following conditions must be met:
- There must be a business condition for the expenses - in other words the expense must be in connection with performance of services - either as an employee or an approved independent contractor- and must be for an expense that the payee could deduct on his/her tax return.
- The payee must substantiate or deemed to have substantiated the expenses. Receipts and/or canceled checks and invoices must show the nature and amount of the expenditure. Expenses for standard mileage rate for business (not commuting) miles and the meal per diem are deemed substantiated without receipts.
- The employee must account for the expenses within a reasonable period of time after incurring the expense. What is a reasonable period of time depends upon the facts and circumstances of each situation. The IRS will consider 60 days after they were paid or incurred.
The situations at the university are not always simple. To be sure that the payment is handled properly, please ask for guidance before promising an individual a stipend or expense reimbursement. Please email firstname.lastname@example.org or call 330-672-8622 for help.