Returning Excess Reimbursements

Under an accountable plan, you are required to return any excess reimbursement for your business expenses to the person paying the reimbursement or allowance. Excess reimbursement means any amount for which you did not adequately account within a reasonable period of time. For example, if you received a travel advance and you did not spend all the money on business-related expenses, or if you do not have proof of all your expenses, you have an excess reimbursement.

Adequate accounting and reasonable period of time were discussed earlier.

Travel advance.   You receive a travel advance if your employer provides you with an expense allowance before you actually have the expense, and the allowance is reasonably expected to be no more than your expense. Under an accountable plan, you are required to adequately account to your employer for this advance and to return any excess within a reasonable period of time.

If you do not adequately account for or do not return any excess advance within a reasonable period of time, the amount you do not account for or return will be treated as having been paid under a nonaccountable plan (discussed later).

Unproved amounts.   If you do not prove that you actually traveled on each day for which you received a per diem or car allowance (proving the elements described in Table 28-2), you must return this unproved amount of the travel advance within a reasonable period of time. If you do not do this, the unproved amount is considered paid under a nonaccountable plan (discussed later).

Per diem allowance MORE than federal rate.   If your employer's accountable plan pays you an allowance that is higher than the federal rate, you do not have to return the difference between the two rates for the period you can prove business-related travel expenses. However, the difference will be reported as wages on your Form W-2. This excess amount is considered paid under a nonaccountable plan (discussed later).

Example.   Your employer sends you on a 5-day business trip to Phoenix and gives you a $225 ($45 × 5 days) advance to cover your meals and incidental expenses. The federal per diem for meals and incidental expenses for Phoenix is $42. Your trip lasts only 3 days. Under your employer's accountable plan, you must return the $90 ($45 × 2 days) advance for the 2 days you did not travel. You do not have to return the $9 difference between the allowance you received and the federal rate for Phoenix [($45 - $42) × 3 days]. However, the $9 will be reported on your Form W-2 as wages.

Nonaccountable Plans

A nonaccountable plan is a reimbursement or expense allowance arrangement that does not meet one or more of the three rules listed earlier under Accountable Plans.

In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan.

1. Excess reimbursements you fail to return to your employer.
2. Reimbursement of nondeductible expenses related to your employer's business. See Reimbursement of nondeductible expenses earlier under Accountable Plans.

If you are not sure if the reimbursement or expense allowance arrangement is an accountable or nonaccountable plan, ask your employer.

Reporting your expenses under a nonaccountable plan.   Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a nonaccountable plan with your wages, salary, or other pay. Your employer will report the total in box 1 of your Form W-2.

You must complete Form 2106 or 2106-EZ and itemize your deductions to deduct your expenses for travel, transportation, meals, or entertainment. Your meal and entertainment expenses will be subject to the 50% limit discussed earlier under Entertainment Expenses. Also, your total expenses will be subject to the 2%-of- adjusted-gross-income limit that applies to most miscellaneous itemized deductions.

Example.   Kim's employer gives her $500 a month ($6,000 for the year) for her business expenses. Kim does not have to provide any proof of her expenses to her employer, and Kim can keep any funds that she does not spend.

Kim is being reimbursed under a nonaccountable plan. Her employer will include the $6,000 on Kim's Form W-2 as if it were wages. If Kim wants to deduct her business expenses, she must complete Form 2106 or 2106-EZ and itemize her deductions.

Completing Forms 2106 and 2106-EZ

This section briefly describes how employees complete Forms 2106 and 2106-EZ. Table 28-3 explains what the employer reports on Form W-2 and what the employee reports on Form 2106. The instructions for the forms have more information on completing them.

Form 2106-EZ.   You may be able to use the shorter Form 2106-EZ to claim your employee business expenses. You can use this form if you meet all 3 of the following conditions.

1. You are an employee deducting expenses attributable to your job.
2. You were not reimbursed by your employer for your expenses (amounts included in box 1 of your Form W-2 are not considered reimbursements).
3. If you claim car expenses, you use the standard mileage rate.

Car expenses.   If you used a car to perform your job as an employee, you may be able to deduct certain car expenses. These are generally figured in Part II of Form 2106, and then claimed on line 1, Column A, of Part I of Form 2106. Car expenses using the standard mileage rate can also be figured on Form 2106-EZ by completing Part II and line 1 of Part I.

Transportation expenses.   Show your transportation expenses that did not involve overnight travel on line 2, Column A, of Form 2106 or on line 2, Part I, of Form 2106-EZ. Also include on this line business expenses you have for parking fees and tolls. Do not include expenses of operating your car or expenses of commuting between your home and work.

Table 28-3. Reporting Travel, Entertainment, Gift, and Car Expenses and Reimbursements

IF the type of reimbursement (or other expense allowance) arrangement is under:	THEN the employer reports on Form W-2:	AND the employee reports on Form 2106: *
An accountable plan with:
Actual expense reimbursement: Adequate accounting made and excess returned	No amount.	No amount.
Actual expense reimbursement: Adequate accounting and return of excess both required but excess not returned	The excess amount as wages in box 1.	No amount.
Per diem or mileage allowance up to the federal rate: Adequate accounting made and excess returned.	No amount.	All expenses and reimbursements only if excess expenses are claimed. Otherwise, form is not filed.
Per diem or mileage allowance up to the federal rate: Adequate accounting and return of excess both required but excess not returned.	The excess amount as wages in box 1. The amount up to the federal rate is reported only in box 12 - it is not reported in box 1.	No amount.
Per diem or mileage allowance exceeds the federal rate: Adequate accounting up to the federal rate only and excess not returned.	The excess amount as wages in box 1. The amount up to the federal rate is reported only in box 12 - it is not reported in box 1.	All expenses (and reimbursement reported on Form W-2, box 12) only if expenses in excess of the federal rate are claimed. Otherwise, form is not required.
A nonaccountable plan with:
Either adequate accounting or return of excess, or both, not required by plan	The entire amount as wages in box 1.	All expenses.
No reimbursement plan:	The entire amount as wages in box 1.	All expenses.
* You may be able to use Form 2106-EZ. See Completing Forms 2106 and 2106-EZ.

Employee business expenses other than meals and entertainment.   Show your other employee business expenses on lines 3 and 4, Column A, of Form 2106 or lines 3 and 4 of Form 2106-EZ. Do not include expenses for meals and entertainment on those lines. Line 4 is for expenses such as gifts, educational expenses (tuition and books), office-in-the-home expenses, and trade and professional publications.

If line 4 expenses are the only ones you are claiming, you received no reimbursements (or the reimbursements were all included in box 1 of your Form W-2), and the Special Rules discussed later do not apply to you, do not complete Form 2106 or 2106-EZ. Claim these amounts directly on line 20 of Schedule A (Form 1040). List the type and amount of each expense on the dotted lines and include the total on line 20.

Meal and entertainment expenses.   Show the full amount of your expenses for business-related meals and entertainment on line 5, Column B, of Form 2106. Include meals while away from your tax home overnight and other business meals and entertainment. Enter 50% of the line 8 meal and entertainment expenses on line 9, Column B, of Form 2106.

If you file Form 2106-EZ, enter the full amount of your meals and entertainment on the line to the left of line 5 and multiply the total by 50%. Enter the result on line 5.

Hours of service limits.   If you are subject to the Department of Transportation's hours of service limits, use 65% instead of 50%.

Reimbursements.   Enter on line 7 of Form 2106 the amounts your employer (or third party) reimbursed you that were not included in box 1 of your Form W-2. (You cannot use Form 2106-EZ.) This includes any reimbursement reported under code L in box 12 of Form W-2.

Allocating your reimbursement.   If you were reimbursed under an accountable plan and want to deduct excess expenses that were not reimbursed, you may have to allocate your reimbursement. This is necessary if your employer pays your reimbursement in the following manner:

1. Pays you a single amount that covers meals and/or entertainment, as well as other business expenses, and
2. Does not clearly identify how much is for deductible meals and/or entertainment.

You must allocate the reimbursement so that you know how much to enter in Column A and Column B of line 7 of Form 2106.

Example.   Rob's employer paid him an expense allowance of $5,000 this year under an accountable plan. The $5,000 payment consisted of $2,000 for airfare and $3,000 for entertainment and car expenses. The employer did not clearly show how much of the $3,000 was for the cost of deductible entertainment. Rob actually spent $6,500 during the year ($2,000 for airfare, $2,000 for entertainment, and $2,500 for car expenses).

Since the airfare allowance was clearly identified, Rob knows that $2,000 of the payment goes in Column A, line 7 of Form 2106. To allocate the remaining $3,000, Rob uses the worksheet from the instructions for Form 2106. His completed worksheet follows.

1.	Enter the total amount of reimbursements your employer gave you that were not reported to you in box 1 of Form W-2	$3,000
2.	Enter the total amount of your expenses for the periods covered by this reimbursement	4,500
3.	Of the amount on line 2, enter your total expense for meals and entertainment	2,000
4.	Divide line 3 by line 2. Enter the result as a decimal (rounded to at least three places)	.444
5.	Multiply line 1 by line 4. Enter the result here and in Column B, line 7	1,332
6.	Subtract line 5 from line 1. Enter the result here and in Column A, line 7	$1,668

After you complete the form.   After you have completed your Form 2106 or 2106-EZ, follow the directions on that form to deduct your expenses on the appropriate line of your tax return. For most taxpayers, this is line 20 of Schedule A (Form 1040). However, if you are a government official paid on a fee basis, a performing artist, or a disabled employee with impairment-related work expenses, see Special Rules, later.

Limits on employee business expenses.   Your employee business expenses may be subject to any of the three limits described next. These limits are figured in the following order on the specified form.

1. Limit on meals and entertainment.   Certain meal and entertainment expenses are subject to a 50% limit. Employees figure this limit on line 9 of Form 2106 or line 5 of Form 2106-EZ. See 50% Limit under Entertainment Expenses, earlier.

2. Limit on miscellaneous itemized deductions.   Employees deduct employee business expenses (as figured on Form 2106 or 2106-EZ) on line 20 of Schedule A (Form 1040). Most miscellaneous itemized deductions, including employee business expenses, are subject to a 2%-of-adjusted-gross-income limit. This limit is figured on line 25 of Schedule A (Form 1040).

3. Limit on total itemized deductions.   If your adjusted gross income (line 36 of Form 1040) is more than $137,300 ($68,650 if you are married filing separately), the total of certain itemized deductions, including employee business expenses, may be limited. See chapter 22 for more information on this limit.

Special Rules

This section discusses special rules that apply only to government officials who are paid on a fee basis, performing artists, and disabled employees with impairment-related work expenses.

Officials paid on a fee basis.   Certain fee-basis officials can claim their employee business expenses whether or not they itemize their other deductions on Schedule A (Form 1040).

Fee-basis officials are persons who are employed by a state or local government and who are paid in whole or in part on a fee basis. They can deduct their business expenses in performing services in that job as an adjustment to gross income rather than as a miscellaneous itemized deduction.

If you are a fee-basis official, include your employee business expenses from line 10 of Form 2106 or line 6 of Form 2106-EZ in the total on line 34 of Form 1040. Write FBO and the amount of your employee business expenses in the space to the left of line 34 of Form 1040.

Expenses of certain performing artists.   If you are a performing artist, you may qualify to deduct your employee business expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. To qualify, you must meet all of the following requirements.

1. During the tax year, you perform services in the performing arts for at least two employers.
2. You receive at least $200 each from any two of these employers.
3. Your related performing-arts business expenses are more than 10% of your gross income from the performance of those services.
4. Your adjusted gross income is not more than $16,000 before deducting these business expenses.

Special rules for married persons.   If you are married, you must file a joint return unless you lived apart from your spouse at all times during the tax year.

If you file a joint return, you must figure requirements (1), (2), and (3) separately for both you and your spouse. However, requirement (4) applies to your and your spouse's combined adjusted gross income.

Where to report.   If you meet all of the above requirements, you should first complete Form 2106 or 2106-EZ. Then you include your performing-arts-related expenses from line 10 of Form 2106 or line 6 of Form 2106-EZ in the total on line 34 of Form 1040. Write QPA and the amount of your performing-arts-related expenses in the space to the left of line 34 of Form 1040.

If you do not meet all of the above requirements, you do not qualify to deduct your expenses as an adjustment to gross income. Instead, you must complete Form 2106 or 2106-EZ and deduct your employee business expenses as an itemized deduction on line 20 of Schedule A (Form 1040).

Impairment-related work expenses of disabled employees.   If you are an employee with a physical or mental disability, your impairment-related work expenses are not subject to the 2%-of-adjusted-gross-income limit that applies to most other employee business expenses. After you complete Form 2106 or 2106-EZ, enter your impairment-related work expenses from line 10 of Form 2106 or line 6 of Form 2106-EZ on line 27 of Schedule A (Form 1040), and identify the type and amount of this expense on the dotted line next to line 27. Enter your employee business expenses that are unrelated to your disability from line 10 of Form 2106 or line 6 of Form 2106-EZ on line 20 of Schedule A.

Impairment-related work expenses are your allowable expenses for attendant care at your workplace and other expenses you have in connection with your workplace that are necessary for you to be able to work. For more information, see chapter 23.

Illustrated Example

Bill Wilson is an employee of Fashion Clothing Co. in Manhattan, NY. In a typical week, Bill leaves his home on Long Island on Monday morning and drives to Albany to exhibit the Fashion line for 3 days to prospective customers. Then he drives to Troy to show Fashion's new line of merchandise to Town Department Store, an old customer. While in Troy, he talks with Tom Brown, purchasing agent for Town Department Store, to discuss the new line. He later takes John Smith of Attire Co. out to dinner to discuss Attire Co.'s buying Fashion's new line of clothing.

Bill purchased his car on January 3, 1999. He uses the standard mileage rate for car expense purposes. He records his total mileage, business mileage, parking fees, and tolls for the year. Bill timely records his expenses and other pertinent information in a travel expense log (not shown). He obtains receipts for his expenses for lodging and for any other expenses of $75 or more.

During the year, Bill drove a total of 25,000 miles of which 20,000 miles were for business. He answers all the questions in Part II of Form 2106-EZ. He figures his car expense to be $7,300 (20,000 business miles × 36½ cents standard mileage rate).

His total employee business expenses are shown in the following table.

Type of Expense	Amount
Parking fees and tolls	$  325
Car expenses	7,300
Meals	2,632
Lodging, laundry, dry   cleaning	8,975
Entertainment	1,870
Gifts, education, etc.	430
Total	$21,532

Bill received an allowance of $3,600 ($300 per month) to help offset his expenses. Bill did not have to account to his employer for the reimbursement, and the $3,600 was included as income in box 1 of his Form W-2.

Because Bill's reimbursement was included in his income and he is using the standard mileage rate for his car expenses, he files Form 2106-EZ with his tax return. His filled-in form is shown on the next page.

Form 2106–EZ, Page 1, for Bill WilsonForms: 2106–EZ

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