Expense Management Policy: IRS Accountable Plan Rules

An expense management policy is the internal rulebook that tells employees what they can charge to the company, how they prove those costs were legitimate, and how the company pays them back. It matters for more than office order. The IRS sets specific requirements for employer reimbursement arrangements, and a policy that misses them turns every reimbursement into taxable wages, with payroll-tax consequences for both sides. Several states also require employers to reimburse necessary business expenses by law, so the stakes reach past federal tax compliance.

The IRS Accountable Plan Test

The IRS splits reimbursement arrangements into two categories. Under an accountable plan, reimbursements are tax-free to the employee and not subject to payroll taxes. Under a non-accountable plan, every dollar the company pays back is treated as additional wages on the employee’s W-2, triggering income tax withholding, Social Security tax, and Medicare tax. The difference comes down to three requirements in Treasury Regulation 1.62-2.¹

Business connection. The expense must relate directly to services performed as an employee. Personal costs incurred during a work trip don’t count.
Substantiation. The employee has to document each expense with enough detail to establish the amount, time, place, and business purpose.
Return of excess. If an advance or allowance exceeds what was actually spent, the surplus goes back to the employer.

Each reimbursed expense also has to be ordinary and necessary for the employer’s trade or business under Internal Revenue Code Section 162. An ordinary expense is one commonly accepted in the industry; a necessary expense is one that is helpful and appropriate for the work being done.²

Deadlines That Keep the Plan Compliant

The IRS doesn’t define “reasonable period” with a single number, but it provides safe harbors most policies adopt. An employee who hits these windows is automatically considered timely:³

Advances received within 30 days before the expense is incurred.
Expense reports and receipts submitted within 60 days after the expense is paid.
Any unspent advance returned within 120 days after the expense is paid.
If the employer sends quarterly statements asking employees to account for outstanding advances, employees must respond within 120 days of the statement.

These deadlines are where most problems start. An employee who sits on receipts for four months, or pockets a leftover advance without returning it, can single-handedly convert a tax-free reimbursement into taxable income.

What Happens When Reimbursements Fail the Test

When a reimbursement doesn’t meet the accountable plan rules, the IRS treats the payment as compensation. The employer reports it on the W-2, withholds federal income tax, and pays the employer share of Social Security and Medicare taxes.¹ The same result applies to a single non-compliant payment inside an otherwise valid plan. If an employee submits an expense report without adequate documentation, or doesn’t return an excess advance within a reasonable period, that particular payment defaults to non-accountable treatment even when the rest of the plan is fine.

The cost is real. On a $5,000 reimbursement reclassified as wages, the employee owes income tax on the full amount. The employer owes the 6.2% Social Security tax and 1.45% Medicare tax on top of the payment, and the employee pays matching amounts. Across hundreds of reimbursements a year, sloppy compliance becomes a significant unplanned tax liability.

Documentation Employees Must Provide

Internal Revenue Code Section 274(d) requires specific documentation for travel expenses, gifts, and listed property before any deduction or tax-free reimbursement is allowed. For each expense, the employee must substantiate four elements:⁴

Amount. The exact dollar figure spent.
Time and place. The date and location of the expense.
Business purpose. A clear explanation of why the expense was necessary.
Business relationship. For meals or gifts, the name and business relationship of each person involved.

A valid receipt should show the merchant’s name, transaction date, and an itemized breakdown of what was purchased. Summarized credit card statements usually won’t suffice because they don’t distinguish business items from personal ones on the same transaction.

The $75 Receipt Threshold

IRS regulations require documentary evidence for any expense of $75 or more, with an exception for transportation charges where receipts aren’t readily available.⁵ Expenses under $75 can be substantiated without physical documentation, though lodging always requires a receipt and many company policies require receipts for all amounts regardless. When a receipt for a larger expense is genuinely lost, the employee should provide a written reconstruction covering the amount, date, vendor, and business purpose, backed by whatever secondary evidence exists such as a bank or credit card record.

Record Retention

The IRS generally requires taxpayers to keep records for at least three years from the date the tax return is filed.⁶ That applies to both the employer’s copies of expense reports and the employee’s personal records. Scanning receipts and storing them digitally is the practical move, since thermal paper receipts fade within months, and a faded receipt is as useful as no receipt during an audit.

What the Policy Should Cover and Cap

Travel and Lodging

Business travel is usually the largest reimbursement category. It covers airfare (typically coach), hotel stays for overnight trips required by work duties, ground transportation like rental cars and rideshares, and incidentals like baggage fees. Most policies cap lodging at the federal per diem rate or a set dollar amount for the destination to keep spending predictable.

Mileage for Personal Vehicles

When employees drive their own cars for business, the standard approach is to reimburse at the IRS standard mileage rate rather than tracking actual gas and maintenance. For 2026, that rate is 72.5 cents per mile.⁷ The rate covers fuel, depreciation, insurance, and maintenance in a single figure. Employees need to log the date, destination, business purpose, and miles driven for each trip. Commuting between home and a regular office doesn’t qualify.

Business Meals

Meals qualify for reimbursement when they have a clear business purpose, such as a working lunch with a client or meals during overnight business travel. The employee has to record who was present and what business was discussed. From the employer’s tax perspective, the deduction for business meals is limited to 50% of the cost, so many companies set reasonable per-meal caps to control the budget.⁴

Per Diem as an Alternative

Instead of tracking every receipt for meals and lodging, some companies use the IRS per diem method, which pays a flat daily rate and simplifies substantiation for both sides. The IRS publishes high-low rates for the continental United States. For the period through September 30, 2026, the high-cost locality rate is $319 per day (with $86 allocated to meals and incidentals), and all other locations get $225 per day (with $74 for meals and incidentals).⁸ Employees receiving per diem payments don’t need to save individual meal receipts, though they still need to document the dates, locations, and business purpose of the travel itself.

Cell Phones and Internet

When an employer provides a cell phone or reimburses an employee’s phone plan for legitimate business reasons, the value is excludable from the employee’s income as a working condition fringe benefit. The IRS removed cell phones from the “listed property” category in 2010, eliminating the burdensome logging requirements that used to apply.⁹ Qualifying business reasons include needing to reach the employee during emergencies, client communication across time zones, or being available outside normal hours. Providing a phone purely as a perk doesn’t qualify. Incidental personal use of a business-purpose phone is treated as a tax-free de minimis fringe benefit, so employees don’t need to track every personal call.

Entertainment and Other Exclusions

This is where older policies often need updating. Before 2018, entertainment expenses were partially deductible when directly related to business. The Tax Cuts and Jobs Act eliminated that deduction entirely. Under current law, no deduction is allowed for any expense related to entertainment, amusement, or recreation, regardless of the business connection.⁴ Sporting event tickets, golf outings, and concert tickets are not deductible even when clients attend. A company can still choose to reimburse these costs, but it won’t get a tax deduction for doing so. Meals eaten at an entertainment event can still qualify for the 50% deduction if they’re purchased separately or clearly itemized apart from the entertainment on the receipt.³

Most policies also exclude:

Personal grooming or clothing, unless specialized safety gear.
Traffic tickets, parking violations, and other legal penalties.
Unauthorized upgrades to first-class travel or luxury hotels.
Spouse or family travel expenses unless they serve a genuine business purpose.
Commuting costs between home and the employee’s regular workplace.

Submission, Approval, and Fraud Controls

The typical reimbursement process starts when the employee uploads a completed expense report with receipts into the company’s expense management system or submits them to accounting. The report moves through an approval chain, usually starting with the employee’s direct supervisor, who verifies that each charge has a business purpose and falls within policy limits. After managerial approval, the finance department checks that totals match receipts and that spending limits haven’t been exceeded. Approved amounts are typically deposited directly into the employee’s bank account or added as a separate line item on the next payroll run. Because properly reimbursed expenses under an accountable plan represent a return of the employee’s own money spent on company business, no taxes are withheld from these payments.

A well-designed policy doesn’t let any single person approve and pay their own expenses. The basic principle is separation of duties: the person who submits an expense shouldn’t be the one who approves it, and the person who approves shouldn’t be the one who cuts the check. In practice, at least three different people touch each reimbursement before money moves. For smaller teams where full separation isn’t realistic, compensating controls like periodic audits by an outside party or mandatory secondary review of all expenses above a set threshold can fill the gap. Role-based access controls in expense software help enforce these separations automatically, and system-enforced controls don’t get ignored under deadline pressure the way manual policies do.

State Reimbursement Mandates

Federal tax law governs how reimbursements are taxed, but whether an employer must reimburse at all is increasingly a matter of state law. A handful of states, including California and Illinois, require employers to reimburse employees for all necessary expenses incurred in the course of their job duties. Some of these laws have become more significant with the rise of remote work, since employees working from home may incur internet, phone, and office supply costs that were previously covered by the employer’s physical office.

Policies written for a workforce spread across multiple states need to account for these differences. An expense that’s optional to reimburse in one state may be legally required in another. Companies with remote or hybrid employees in states with reimbursement mandates should review those obligations separately from the federal tax framework, since failing to reimburse can result in penalties or wage claims under state labor law.

1
eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements
2
Office of the Law Revision Counsel. 26 U.S. Code 162 – Trade or Business Expenses
3
Internal Revenue Service. Publication 463 – Travel, Gift, and Car Expenses
4
Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses
5
Internal Revenue Service. Revenue Ruling 2003-106
6
Internal Revenue Service. How Long Should I Keep Records
7
Internal Revenue Service. Standard Mileage Rates Updated for 2026
8
Internal Revenue Service. Notice 2025-54 – Special Per Diem Rates
9
Internal Revenue Service. Tax Treatment of Employer-Provided Cell Phones