Q&A: How Do We Treat Excess Reimbursements That Aren’t Repaid?

We pay advances to our employees for upcoming church-related business and travel expenses. We know

We pay advances to our employees for upcoming church-related business and travel expenses. We know whatever is not used by the employees should be returned, but how long do they have to return the funds? And what happens if they don’t return the excess?
Under an accountable plan, you are required to return any excess reimbursement or other expense allowance for your business expenses to your employer. “Excess reimbursement” means any amount for which you did not adequately account within a reasonable period of time … . While the meaning of a reasonable period of time depends on the facts of each case, the IRS will always accept 120 days as a reasonable period of time.
The income tax regulations specify that if an employer establishes an accountable arrangement but an employee fails to return, within a reasonable period of time, any reimbursements in excess of substantiated expenses, “only the amounts paid under the arrangement that are not in excess of the substantiated expenses are treated as paid under an accountable plan.” Any expenses not treated as “paid” under an accountable plan are therefore considered taxable income.

Adapted from theChurch & Clergy Tax Guide.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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