Accountable plan reimbursements for tools and equipment.

In a recent private letter ruling, the IRS clarified how employer reimbursement of employee expenses for tools, equipment, training or certification required as a condition of employment may qualify as an accountable plan under IRC [section] 62.

Reimbursements under an accountable plan are excluded from gross income of employees and are exempt from withholding and payroll taxes. Generally, an accountable plan is one that requires reimbursed expenses to have a business connection and for employees to substantiate reimbursed expenses and return to the employer any amount they receive in excess of the substantiated amount (IRC [section] 62(c) and Treas. Reg. [section] 1.62-2(c)(1)).

Tool reimbursements became such an important issue that in July 2000 the IRS developed a coordinated issue paper on them. Relying on Shotgun Delivery Inc. v. U.S. (85 E Supp. 2d 962 (N.D. Calif. 2000)), the IRS concluded that tool reimbursement plans typically operated at that time did not qualify as accountable plans. However, the Service said, a plan could qualify if, along with meeting other requirements, reimbursements were not made in lieu of other compensation. In a decision issued after the coordinated issue paper was released, the Ninth Circuit affirmed this aspect of the district court's decision (Shotgun Delivery Inc. v. U.S., 269 F.3d 969 (9th Cir. 2001)). In 2008, the IRS in an updated version of the earlier coordinated issue paper (LMSB-04-0608-037, revised July 2, 2008) again stated that tool reimbursement plans, as the Service had seen them, did not meet the accountable plan requirements.

The plan for which the recent ruling was sought, however, could be distinguished in these ways:

Business connection. Under Treas. Reg. [section] 1.62-2(d), the expense must be an item that would be allowed as a business expense deduction. The IRS ruled that the plan would satisfy this requirement by these features:

* Employees would have to certify that the tools and equipment are necessary to perform services for the employer.

* Only expenses deductible under section 162 (trade or business expenses) or section 179 (election to expense certain depreciable business property) could qualify for reimbursement.

* Tools and equipment must be kept on-site.

* The technician's manager would be required to verify that the tools and equipment are necessary to perform services for the employer.

* The reimbursements would not be in lieu of any other compensation.

* Only expenses incurred after becoming an employee would be reimbursed.

For tools and equipment that are deductible under section 179, the employee would be required to certify:

* The costs could otherwise be deductible by the employee under section 179.

* The employee would reduce the limits imposed by section 179 by the amount of the reimbursement.

Substantiation. The IRS ruled the plan would meet the requirements of Treas. Reg. [section] 1.62-2(e) because each of the following would be documented with a claim form and receipt or other written proof of purchase submitted within 30 days for each expense:

* The date, amount and type of expense.

* Documentation that the expense is incurred in connection with providing services to the employer.

Return of excess reimbursement. Treas. Reg. [section] 1.62-2(0 requires that employees return any excess reimbursements. The plan would satisfy this requirement by not permitting any cash advances. Thus, no excess reimbursement should occur, and any amounts reimbursed in error would be required to be returned to the employer. The plan also would require workers who leave employment to repay all reimbursements made during the last six months of employment.

* Private Letter Ruling 200930029 (April 13, 2009)

By W. Joey Styron, CPA, Ph.D., director of the Knox School of Accountancy at Augusta State University, Augusta, Ga.