Employee Expenses from Prior Years

EIther this is reimbursed under an accountable plan or a nonaccountable plan.

If a nonaccountable plan, the reimbursement is treated as taxable employee wages for both the payer and payee.

One of the requirements of an accountable plan is the employee submits reimbursement requests with proof of expenses "within a reasonable time."

See

pages 41-42 where the IRSannounces they will treat employee requests for reimbursement madewithin 60 days of incurring the expense and repays any cash advance within120 days as being made "within a reasonable time."

Your case is a few years old and therefore no longer comes within the accountable plan rules. They can still be reimbursed as an unaccountable plan which treats them as taxable wages.

With all due respect to my esteemed colleague, Art - I am not sure I agree with his assessment (though on examination it is very possible that the IRS would take a similar position). The example he references deals with an ADVANCE made against an expense report to be submitted later. Your situation differs in that it deals with a late request for reimbursement where there was no advance given to the employee.

There are a few items I would consider before offering guidance -

1 - what is the official written company policy on reimbursements? How often are they due? What support is required with them?

2 - does this employee own any part, more importantly any SIGNIFICANT part, of the company? If this is HIS S Corp it puts him in a different light than if he's just an employee of an unrelated organization. Though there may be a way to deal with this too, but more on that shortly.

3 - has the company ever done this before and if so under what circumstances?

I can foresee a situation where a company says to its employees "we're short on cash right now. So if you work with us and hold your expense reports until our situation improves then we will honor your expense reimbursement requests in later years." IF the company were to have such a policy it would need to be documented, not only in the form of a memo but also in the minutes of the company's records. I seriously doubt, however, that any company would formally adopt such a policy. As a tax professional and business advisor I would advise AGAINST such a policy.

Regarding a company owner doing this - there are lots of cases where the owner can't get all that's due to him out timely. Generally, and more especially for the smaller businesses, the owners get paid last. If this was properly documented annually in the minutes he could make a case for taking his money out later. But it should have been documented annually. SIDE NOTE - this is one of the reasons I'm a proponent of LLCs having annual meetings with minutes like corporations due, documenting this sort of thing can help later on.

Gene E. Utterback, EA, RFC, ABA

The governing law on this subject is in the Regulations for sections 62,

162 and 274. The "reasonable period of time" governing law is at 1.62-2(g). It is this reg that the IRS uses for the Pub 535 words. The only safe harbors listed under the definition are for advances and returns of excess payments. Therefore, one is left with a definition that says a reasonable period of time depends upon all the facts and circumstances. I have not researched any rev. rulings or court cases on this specific issue. I have seen a few written accountable plans and they all either included a statement on what was a reasonable period or pointed one to the policy that included the definition. Any payment for reimbursement beyond the specified time period was wages subject to payroll taxes. I have seen time periods that ranged from no later than 30 days after the expense has occurred to no later than 90 days after the expense was occurred. I have no doubt that there are probably policies that extend beyond 90 days. Personally, I would never recommend a policy that extended beyond the end of the year in which the expense occurred except for those expenses occurring in the last quarter, in which case I would recommend no later than 90 days after the end of that quarter.

SNIPPED SOME MORE

Thanks to Alan for the citation. I always appreciate a cite to relevant authority. I have NOT checked the cited authority (yet) so I cannot agree or disagree with his assessment. I can say this - checking relevant authority is ESSENTIAL prior to taking a position.

Gene E. Utterback, EA, RFC, ABA