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The Proper Treatment of Expense Reimbursment – IRS Emphasis in Union Local Audits

May 31, 2012
By Salvatore J. Armao, CPA/PFS, CFP, CFE, CGMA

Two areas that are often overlooked by union locals – but not overlooked by IRS auditors – are employer provided vehicles and reimbursed employee expenses. By taking note of the following information, union locals can avoid two common record keeping pitfalls when filing tax returns.

EMPLOYER PROVIDED VEHICLES

•The use of an employer provided vehicle is taxable to an employee and the personal use value of the vehicle must be reported on the employee’s Form W-2 as income. The personal use value amount is subject to income and Social Security tax as well as federal unemployment tax.

•The personal use value portion of expenses in connection with the employer provided vehicle which are paid directly by the employer (gas, insurance, etc.) are also subject to taxation and must be reported on the employee’s W-2 as income.

•    There are three valuation rules for assessing the use of the employer provided vehicle:

o    Automobile lease valuation rule: You determine the value of an automobile you provide to an employee by using its annual lease value. For an automobile provided only part of the year, use either its prorated annual lease value or its daily lease value.

o    Vehicle cents-per-mile rule: You determine the value of a vehicle you provide to an employee for personal use by multiplying the standard mileage rate (currently set by the IRS at 55.5 cents/mile) by the total miles the employee drives the vehicle for personal purposes.

o    Commuting valuation rule: You determine the value of a vehicle you provide to an employee for commuting use by multiplying each one-way commute (that is, from home to work or from work to home) by $1.50.

REIMBURSED EMPLOYEE EXPENSES

There are two common methods of reimbursing employees for business expenses in connection with their employment:

•    Accountable Plan: When an employee is required to report, and does report, business expenses for travel, transportation, lodging, entertainment and similar purposes, paid or incurred for him/her solely for the benefit of the employer, reimbursements or advances paid are excluded from an employee’s income, and are not required to be reported on the employee’s Form W-2, and are exempt from income and employment tax withholding.

o    Under the Accountable Plan, the employee must submit an adequate accounting to the employer, in which the expense is recorded at the time it is made along with documentary evidence such as paid bills or receipts.

•    Unaccountable Plan: Does not require any reporting by the employee to the employer. All advances, allowances and reimbursements under an Unaccountable Plan must be included in the employee’s gross income, are reported on his/her Form W-2 and are subject to employment tax withholding.

o    The employee may claim itemized deductions for expenses attributable to amounts received under an Unaccountable Plan by filing Form 2106 with his/her personal tax return.

If your organization has not reviewed its policies regarding these areas to ensure compliance with IRS regulations, it should be done as soon as possible. Don’t wait for an IRS audit to find out you are doing it wrong.

For over 25 years, Armao, Costa & Ricciardi, CPAs, P.C., has been committed to providing accounting, auditing, tax, financial and wealth management and advisory services to labor unions and employee benefit funds. Visit us at www.acrcpa.com or call 516.256.3200.
 

May 31, 2012

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