IRS Deudctions

Employer Reimbursements

Whether you can deduct allowable work related expenses depends on your reimbursement arrangement with your employer. Your employer may not reimburse you at all for your work related expenses. In this case, any allowable expense is fully tax deductible subject to the 2% limit and the AGI limit.

If you are reimbursed, the type of reimbursement plan you have determines the tax deductibility of your expenses. An allowance or reimbursement plan is either an accountable or a nonaccountable plan.

Accountable Plan

If your employer reimburses you under an accountable plan, you cannot claim a tax deduction for any amount for which you were reimbursed. This is because your employer does not include the payments in your wages and your are therefore not taxed on these payments.

To be an accountable plan, your employer's plan must meet all three of the following rules:

  1. You must have paid or incurred the expenses while performing services as an employee of your employer.
  2. You must adequately account to your employer for these expenses within a reasonable period of time.
  3. You must return any excess reimbursements or allowance within a reasonable period of time.

Definition of excess reimbursement or allowance

An excess reimbursement or allowance is any amount that is more than the business related expenses you reported to your employer.

If you meet the three rules, your employer should not include in box 1 of your W-2 form any of the reimbursements that were paid to you. If your expenses equal  your reimbursements, you have no tax deduction. If your expenses exceed your reimbursements, the excess amount of expenses is tax deductible.

Nonaccountable Plan

If you are reimbursed under a nonaccountable plan, your employer includes the entire amount of the reimbursement as wages in box 1 of your W-2 form. All your eligible expenses are deductible on Schedule A if you receive reimbursements under a nonaccountable plan. You do not reduce your expenses by the amount of the reimbursement. A nonaccountable plan is a reimbursement arrangement that does not meet the rules for an accountable plan.

Your employer makes the decision whether to reimburse you under an accountable or nonaccountable plan. If you receive payments under a nonaccountable plan, you cannot convert these amounts to payments under an accountable plan by voluntarily accounting for your expenses to your employer or by returning excess payments.