Expense Account
Encyclopedia
An expense account is the right to reimbursement of money spent by employees for work-related purposes.
, the use of an expense account can be traced back to George Washington
, who chose to forego a salary and relied on an expense account to cover his purchases during his military leadership in the American Revolution
.
Under today's tax laws of the United States
, expense accounts are treated as either "accountable" or "unaccountable". Accountable expense accounts are subject to a variety of restrictions. Accountable expense accounts are subject to a variety of Internal Revenue Service
regulations. There must be a documented business purpose for the account. Spending from the account must be documentable, typically by means of receipt
s. Any money entrusted to the employee from the account that is not spent for business purposes and accounted for must be returned to the employer.
Money paid to an employee under an accountable expense account is not treated as taxable income
to the employee. Money paid to an employee under an unaccountable plan is treated as income to the employee. Business expenses paid out of an nonaccountable plan are deductible from the employee's taxable income only as miscellaneous itemized deduction
s, and even then, they are only deductible if the expenses are equal or greater than 2% of the employee's income.
Special rules govern certain types of business expenses, including rules for travel, entertainment, food, and gifts.
Expense accounts are also privately regulated by internal auditors for many employers, often to ensure funds are handled appropriately.
US tax treatment of expense accounts
In the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, the use of an expense account can be traced back to George Washington
George Washington
George Washington was the dominant military and political leader of the new United States of America from 1775 to 1799. He led the American victory over Great Britain in the American Revolutionary War as commander-in-chief of the Continental Army from 1775 to 1783, and presided over the writing of...
, who chose to forego a salary and relied on an expense account to cover his purchases during his military leadership in the American Revolution
American Revolution
The American Revolution was the political upheaval during the last half of the 18th century in which thirteen colonies in North America joined together to break free from the British Empire, combining to become the United States of America...
.
Under today's tax laws of the United States
Taxation in the United States
The United States is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, property, sales, imports, payroll, estates and gifts, as well as various fees.Taxes are imposed on net income of...
, expense accounts are treated as either "accountable" or "unaccountable". Accountable expense accounts are subject to a variety of restrictions. Accountable expense accounts are subject to a variety of Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
regulations. There must be a documented business purpose for the account. Spending from the account must be documentable, typically by means of receipt
Receipt
A receipt is a written acknowledgment that a specified article or sum of money has been received as an exchange for goods or services. The receipt is evidence of purchase of the property or service obtained in the exchange.-Printed:...
s. Any money entrusted to the employee from the account that is not spent for business purposes and accounted for must be returned to the employer.
Money paid to an employee under an accountable expense account is not treated as taxable income
Taxable income
Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that...
to the employee. Money paid to an employee under an unaccountable plan is treated as income to the employee. Business expenses paid out of an nonaccountable plan are deductible from the employee's taxable income only as miscellaneous itemized deduction
Itemized deduction
An itemized deduction is an eligible expense that individual taxpayers in the United States can report on their federal income tax returns in order to decrease their taxable income....
s, and even then, they are only deductible if the expenses are equal or greater than 2% of the employee's income.
Special rules govern certain types of business expenses, including rules for travel, entertainment, food, and gifts.
Expense accounts are also privately regulated by internal auditors for many employers, often to ensure funds are handled appropriately.
External links
- http://tierneylab.blogs.nytimes.com/2008/06/06/expense-account-science/That Expense-Account Science, The New York TimesThe New York TimesThe New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
, June 6, 2008] - The Most Common Expense Account Abuses, BusinessWeek