Employers Expense Reimbursement Arrangement Was Accountable Plan

The IRS approved an expense reimbursement arrangement under which a professional consulting business reimbursed it’s service technicians for trade equipment (including tools, supplies, and equipment), certification, and training (IRS Letter Ruling 200930029). As a result, all payments made under the plan in accordance with the terms of the plan were excluded from the technician’s income and were not wages subject to withholding and payment of employment taxes.

The taxpayer operated a professional consulting business, offering to sell professional tools and equipment and to provide services, such as repair and maintenance, to its customer base. The taxpayer’s technicians were required to provide and maintain their own tools and equipment for performing repair work.

The reimbursement plan only applied between the taxpayer and the taxpayer’s technicians, and it only reimbursed covered costs. Only qualified employees were allowed to participate in the plan, meaning those employees who possessed the requisite amount of experience and had purchased tools or incurred covered costs. Moreover, these technicians were required to complete a certification from detailing the terms and conditions of the plan. The plan was drafted so as to exclude from reimbursement any expenses incurred in connection with another employer.

Reimbursement was only made for tools and equipment that were:

• Exclusively for the taxpayer’s business;
• Purchased by the technician while an employee of the taxpayer;
• Maintained at the taxpayer’s place of business;
• Needed to perform job assignments;
• Purchased from an approved vendor; and
• Considered necessary for the applicable industry.

The IRS ruled that the expense reimbursement plan satisfied the accountable plan requirements of Code Sec. 62 (c). The facts and circumstances of the taxpayer’s business and the plan, including the certifications required and the plan’s claim procedures, established that the plan reimbursed only business expenses that were deductible under Code Sec 162 or 179 and that were incurred by technicians in performing services for the taxpayer’s business, The substantiation requirement was met because technicians were required to submit a claim form along with written confirmation of proof of purchase that provided sufficient information with respect to the amount, date and type of expense incurred.

In addition, the plan only reimbursed expenses incurred to purchase tools and equipment that were used solely for business purposes on the work sire and were kept on the site at all times. Thus, the substantiation requirements of Code Sec 162 and, for such listed property as computers or peripheral equipment, Code Sec. 274 (d), were met. Furthermore, expenses were required to be substantiated within a reasonable period of time from the date the expense was incurred.

Finally, the plan satisfied the requirements of returning amounts in excess of cost because it reimbursed only properly substantiated expenses already incurred. Allowances or cash advances for expenses already incurred were not reimbursed. In addition, any erroneous reimbursement was required to be returned within a reasonable period of time.