An arrangement established by a business, specifically an S corporation, that adheres to IRS guidelines for reimbursing employees for business expenses. This arrangement ensures that reimbursements are excluded from an employee’s taxable income and are deductible by the corporation. It requires expenses to have a business connection, be adequately accounted for with supporting documentation, and any excess reimbursements to be returned to the company within a reasonable timeframe. Failure to meet these requirements results in the reimbursements being treated as taxable wages.
Such a formalized plan offers significant benefits. It allows S corporations to reimburse employees (including shareholder-employees) for legitimate business expenses without increasing their taxable income or the corporation’s payroll tax liability. The ability to deduct these reimbursements reduces the corporation’s overall tax burden. Historically, the implementation of this type of arrangement has been recognized as a best practice for sound financial management and compliance with tax regulations.
