Tax-free employee reimbursements under an accountable plan.

Ref: IRS Revenue Rulings 2012-25 and 2012-37.

Reimbursements to employees under an accountable plan are not included in employee wages and are fully deductible by the employer. Common examples are reimbursements for mileage using the IRS standard mileage rates and reimbursement for employee cell phone use.

3 tests: In order to qualify, a plan must meet three tests: Business connection, substantiation and returning excess. These are discussed in Regulation 1.62-2.

IRS discusses the Business Connection Test in the above Revenue Rulings. In summary, the business connection test is met if the plan is not “wage rechacterization,” the expenses are incurred by the employee, and the expenses are in connection with the performance of his/her services.

Used correctly, this rule can greatly benefit both the employer and employee. An example would be reimbursement of employee business mileage at the 2014 rate of 56 cents per mile (when the employee is driving a hybrid car). The employer receives the deduction of 56 cpm and the employee receives the reimbursement tax-free.

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