EMPLOYEE BUSINESS EXPENSE REIMBURSEMENT POLICY

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1 EMPLOYEE BUSINESS EXPENSE REIMBURSEMENT POLICY Updated as of November

2 TO: FROM: Synechron, Inc. Montage Services, Inc. DATE: November 1, 2013 RE: Employee Business Expense Reimbursement Policy EXECUTIVE SUMMARY Employees often incur business expenses related to their employment responsibilities. The employee may or may not be reimbursed by the employer for these business expenses. This memo explores the U.S. tax treatment of reimbursable business expenses and provides guidance for Synechron, Inc. s expense reimbursement policy. In general, a business expense must be valid in order for an employer to deduct the expense on their U.S. tax filing. The most common types of employee expenses that may be considered valid business expense deductions include: Travel and transportation other than an employee s regular commute; Meals and entertainment during business travel (generally 50% deductible); Computers and equipment or automobiles purchased and used for business; Professional dues; Educational expenses related to the employees job; Home office expenses; and Medical reimbursements. The documentation requirements for business expenses are generally similar to validate the amount and business purpose; however specific documentation is required for certain expenses. For example: For listed property which is property that has a possible personal use, such as automobiles, the business use (vs. personal) must be documented; Tuition reimbursements must be related to the employees current job; and Certain meals are 100% deductible these are outlined below. The Synechron internal policies should include a requirement for proper documentation supporting the employee s expense reimbursement claim. Often times this is facilitated by a reimbursement request form with the relevant receipts attached. U.S. tax treatment of business expenses depends primarily on whether the expenses: 1 P a g e

3 Are not claimed by the employee and therefore not reimbursed by the employer The expenses are self-reported on the employee s personal income tax expense reporting. The employer does not take a deduction for the expenses. Are claimed by the employee and reimbursed by the employer under an accountable plan The expenses are not includable in the employee s income. The employer takes a deduction for the expenses. Are claimed by the employee and reimbursed by the employer under a non-accountable plan The expenses are reportable as income to the employee. The employee takes a deduction for the expenses. DISCUSSION A. Deductibility of Employee Business Expenses A business expense deduction generally may be taken for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. 1 A valid business expense deduction has three basic elements: The taxpayer's activities must constitute a trade or business; The expense must be paid or incurred during the taxable year in carrying on the trade or business; and The expense must be an ordinary and necessary expense in the context of the taxpayer's trade or business. 1. Trade or Business Requirement The first requirement for the business expense deduction is that the taxpayer must be engaged in a trade or business. An employee's performance of services is a trade or business for this purpose, and the employer is clearly engaged in a business so business expenses can be incurred and deducted by either. 1 Internal Revenue Code 162(a) 2 P a g e

4 2. Connection between Expense and Trade or Business The second requirement for deduction is that the expense must be paid or incurred in carrying on the taxpayer's trade or business. Personal, living, or family expenses cannot be deducted as business expenses Ordinary and Necessary Requirement The final requirement for deduction as a business expense is that the expense must be ordinary and necessary. Whether an expense is ordinary and necessary depends on the surrounding facts and circumstances. B. Expenses Not Claimed by Employee If an expense is reimbursable by an employee s employer, but the employee fails to claim the reimbursement, the expense is not deductible as an employee business expense. Expenses for which reimbursement is available, but for which it is not sought, are not necessary or reasonable. C. Expenses Claimed by Employee under Accountable Plans A reimbursement or other expense allowance arrangement is an arrangement between an employer and employee that satisfies three basic requirements 3 : Business connection; Substantiation; and Return of excess amounts. Arrangements that comply with the three requirements are known as accountable plans Business Purpose To qualify as an accountable plan, an arrangement must provide advances, allowances, or reimbursements for business expenses. 5 The business expenses covered must: 2 Internal Revenue Code 262; Treasury Regulations (a) 3 Internal Revenue Code 62(a)(2)(A), (c); Treasury Regulations (c)(1) 4 Treasury Regulations (c)(2) 5 Treasury Regulations (d) 3 P a g e

5 Satisfy the requirements for deduction as business expenses 6 as noted in Section A above; and Be paid or incurred by the employee in connection with the performance of services as an employee. 7 Allowances under the plan may include per diem allowances, allowances for meals and incidental expenses, and mileage allowances. The employer's records must reflect the payment of the reimbursement or other expense allowance to the employee. For example, a payment may be made in a separate payment to the employee. If both the employee's wages and a payment under the plan are combined in a single payment, the amount of the reimbursement or other expense allowance must be separately stated. 2. Substantiation to Employer An accountable plan must require employees to furnish adequate substantiation of reimbursed expenses to the employer. 8 Generally substantiation should be provided with regard to the amount, time, place and business purposes of the expense. It is not sufficient if an employee merely aggregates expenses into broad categories or reports expenses in non-descriptive terms (e.g., miscellaneous business expenses). 9 The information must be submitted within a reasonable period of time. 3. Return of Excess Amounts An accountable plan requires substantiation of the expenses by the employee and does not permit the employee to retain amounts exceeding substantiated expenses. 10 D. Expenses Claimed by Employee under Non-Accountable Plans An arrangement between an employer and employees for advances, allowances, or reimbursement of business expenses that does not meet at least one of the three basic requirements of an accountable plan is treated as a non-accountable plan. 11 If an employer provides a non-accountable plan, an employee cannot require the employer to treat the payments as paid under an accountable plan by voluntarily substantiating the expenses and returning any excess to the employer. To deduct expenses paid under a non-accountable plan, an employee must substantiate the expenses to the IRS. 6 Treasury Regulations (d)(1) 7 Internal Revenue Code 62(a)(2)(A); Treasury Regulations (d)(1) 8 Treasury Regulations (e)(1) 9 Treasury Regulations (e)(2) 10 Internal Revenue Code 62(c) 11 Treasury Regulations (c)(3)(i) 4 P a g e

6 When an employee's expenses are reimbursed under a non-accountable plan, the employer must report the reimbursed amounts under the plan as wages on the employee's annual Form W-2, and such amounts are subject to the federal income and employment tax withholding requirements. 12 EXPENSE REIMBURSEMENT CHART The chart below lists the Synechron reimbursement heads or categories. The tax treatment of each of the expense reimbursements has been analyzed from the standpoint of the employee and the standpoint of the employer, Synechron. This Chart is based on: - Synechron having an accountable plan in place; - The expense is a valid ordinary and necessary business expense; and - The employee submits documentation to verify the amount and business purpose of the expense. Reimbursement Head Employer (Synechron) Employee Advance to Employee For Expenses Not taxable or includable in Gas Expenses (unrelated to commuting) Repairs and Maintenance Training Fees/Expenses Recruitment Expense Employee Medical Reimbursements Prescribed drugs or insulin relate drugs are deductible. However, an employer using the accrual method of accounting cannot deduct an amount for covered medical expenses during its taxable year for which reimbursement claims have not been filed. All events necessary to fix the employer s liability are not considered to have occurred until a claim is filed. Prescribed drugs or insulin are not taxable or includable in the under IRC Treasury Regulations (c)(5) 5 P a g e

7 Reimbursement Head Employer (Synechron) Employee Synechron India - Employee Recovery If included as part of the employee's compensation, deductible If amounts are treated as an advance of salary, taxable to the employee as part of the employee s compensation Health Insurance Not taxable or includable in under IRC 106 Health & Dental insurance refund of expenses not covered Not taxable or includible in the Meals & Entertainment (Not client related) If Meal & Entertainment expenses meet any one of the following criteria, they are generally fully deductible: a. Expenses treated as part of compensation paid to an employee (and subject to withholding) or otherwise included in the gross income of the recipient of the meals or entertainment. b. Expenses for traditional recreational, social or similar activities for employees (e.g., Christmas parties, summer outings, etc.) c. Expenses for services or facilities which are made available by the taxpayer to the general public (e.g., promotional tickets or samples provided to customers). d. Food or beverage expenses excludable from the gross income of the recipient under the de minimis fringe benefit rules. (i.e., occasional cocktail parties, group meals, or picnics for employees and their guests.) e. Ticket costs to sports events arranged for the primary purpose of benefiting 501(c)(3) organizations. Not taxable or includable in 6 P a g e

8 Reimbursement Head Employer (Synechron) Employee Meals, Entertainment (client related and general travel) Expenses ancillary to providing entertainment and meals to the client, including taxes and tips, cover charges, parking, or room rental for a dinner or related party, are subject to the 50% deductibility. However, travel and transportation are fully deductible even if in the context of providing entertainment and meals. Not taxable or includable in Telephone/Internet /Mobile Phone Car Allowance Car allowances paid to employees are generally deductible under IRC 162(a). In most cases, an employer may choose to reimburse the employee a mileage allowance in lieu of actual automobile expenses. As of January 1, 2013, the Federal standard mileage rate is 56.5 cents per mile. provided the employee submits documentation of the business purpose. Mileage-rate reimbursements for valid business related travel are excludable employee wages, if equal to or less than the standard Federal mileage rate. Car Rental/Leased Car Postal & Courier/ Visa Expenses 7 P a g e

9 Reimbursement Head Employer (Synechron) Employee Tuition Fee If the education is related to the employee s current occupation, deductible. If the education is related to the employee s current occupation, the expense is not taxable or includable in the employee s wages. Relocation Expenses/ Lease Breakage (Rent) However, educational expenditures paid that qualify the employee for a new trade or business is treated as a personal expense and not deductible. Education unrelated to the employee s current occupation is the employee s personal expense. In the case of an employer who pays or reimburses moving expenses of an employee, the amount is included as compensation of the employee IRC 82. Office Expenses Air Fare Lodging/ Guest House Refund /Rent/Guest House- Miscellaneous Expenses/ Guest House- Power Lodging for travel status employees (hotels, guest house, etc.) while traveling is deductible if the trip has a business purpose. Local Lodging expenses for non-travel status employees are generally considered to be personal expenditures that do not qualify as ordinary and necessary under IRC 162(a). However, if the employer requires its employees to stay at a local hotel for the bona fide purpose of facilitating training or team building directly connected with the employer s trade or business, it is fully deductible. 8 P a g e

10 Reimbursement Head Employer (Synechron) Employee Membership & Subscription required to maintain or improve skills or required by law or regulations Membership required to maintain or improve skills or required by law or regulations Fixed Assets Employers often provide employees with certain equipment for use outside of the employer s premises for the performance of their duties. These items are considered listed property. Since the property by its nature lends itself to personal use, strict substantiation requirements apply. Employees are required to account for business and personal use. Examples include automobiles and computers. The following rules apply to listed property under IRC 280F: a. Business use is excludable from the wages of the employee as a working condition fringe benefit. b. Personal use is included in the wages of the employee. c. If substantiation requirements are not met, all use is included in the wages of the employee. Substantiation Requirements The employee must keep records of business and personal use of listed property in order to determine whether the value of any of the use is to be included in the. The employee must keep records of business and personal use of listed property in order to determine whether the value of any of the use is to be included in the. 9 P a g e

11 Reimbursement Head Employer (Synechron) Employee Employee Medical Reimbursement Computer & Software Expense Motor Car Expenses/Vehicle repairs Advance to employee against salary/loan to employee Staff Welfare-others For full deductibility, the reimbursement plan must: a. Be funded by solely by the employer and cannot be funded by salary reduction. b. The plan may only provide benefits for substantiated medical expenses only. This plan may be offered in conjunction with other employerprovided health benefits. Computer see Fixed Assets. Software if the software is used directly for operations or other functions that are directly related to business, it is deductible as a business expense under IRC 162(a). as business expenses if the expenses arise in connection with the employee s performance of services under IRC 162(a). Advances or loans are not deductible when made. The advance or loan is an asset, not an expense. If the employee performs services and does not repay the advance or loan, then deduct the advance as wages. Contributions made to an employee welfare benefit fund are limited to the fund's qualified cost for the taxable year. If employer s contribution to the fund is more than its qualified cost, carry the excess over to the next tax year pursuant to IRC 419(c). Employees can exclude from income reimbursements they receive from their employers for medical expenses... If the advance or loan is not repaid, it is included as taxable wages to the employee. 10 P a g e