Cash Advance & The Law

In Summary: The university's travel cash advance policy is determined by IRS Publication 463, under 'Reimbursement, Allowance, or Advance, which details the way accountable plans and also nonaccountable plans decide how traveler is reimbursed.

• When expenses meet accountable plan rules, they are reimbursed directly and are excluded from taxable income.
   
• When expenses don't meet the rules, they're added to traveler's wages on their W-2 as taxable income.
   
  • The publication outlines the no-more than 30 days out payment issuance timeframe, the 60 day deadline for finalized reconciled expenses, and return of excess reimbursement within 120 days.

IRS Cash Advance Policy: Ready, Set... Collapse! 

Information about IRS travel cash advance policy and UT's process can be found in the following publications:

1. IRS Publication 463 <-- Warning: Link overload dead ahead!
2. UT HBP Travel Chapter 11 Part 4  (process & procedure)
    

Publication 463 outlines the two allowable ways to process reimbursement for travel-related cash advances. In addition to detailing how approved accountable plans or nonaccountable plans are applied to reimbursement requests, the publication also details the tax implications associated with both methods. See below.

Accountable Plans

To be an accountable plan, your employer's reimbursement or allowance arrangement must include all of the following rules.

1. Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer.

2. You must adequately account to your employer for these expenses within a reasonable period of time.

3. You must return any excess reimbursement or allowance within a reasonable period of time.

Adequate accounting and returning excess reimbursements are discussed later.

An excess reimbursement or allowance is any amount you are paid that is more than the business-related expenses that you adequately accounted for to your employer.

Reasonable period of time
The definition of reasonable period of time depends on the facts and circumstances of your situation. However, regardless of the facts and circumstances of your situation, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time.

• You receive an advance within 30 days of the time you have an expense.

• You adequately account for your expenses within 60 days after they were paid or incurred.

• You return any excess reimbursement within 120 days after the expense was paid or incurred.

• You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement.

Employee meets accountable plan rules
If you meet the three rules for accountable plans, your employer shouldn’t include any reimbursements in your income in box 1 of your Form W-2.

Accountable plan rules not met
Even though you are reimbursed under an accountable plan, some of your expenses may not meet all three rules. All reimbursements that fail to meet all three rules for accountable plans are generally treated as having been reimbursed under a nonaccountable plan (discussed later).

Failure to return excess reimbursements
If you are reimbursed under an accountable plan, but you fail to return, within a reasonable time, any amounts in excess of the substantiated amounts, the amounts paid in excess of the substantiated expenses are treated as paid under a nonaccountable plan. See Reasonable period of time, earlier, and Returning Excess Reimbursements, later.

Reimbursement of nondeductible expenses
You may be reimbursed under your employer's accountable plan for expenses related to that employer's business, some of which would be allowable as employee business expense deductions and some of which would not. The reimbursements you receive for the nondeductible expenses don’t meet rule (1) for accountable plans, and they are treated as paid under a nonaccountable plan.

Adequate Accounting
One of the rules for an accountable plan is that you must adequately account to your employer for your expenses. You adequately account by giving your employer a statement of expense, an account book, a diary, or a similar record in which you entered each expense at or near the time you had it, along with documentary evidence (such as receipts) of your travel, mileage, and other employee business expenses. (See Table 5-1 in chapter 5 for details you need to enter in your record and documents you need to prove certain expenses.) A per diem or car allowance satisfies the adequate accounting requirement under certain conditions. See Per Diem and Car Allowances, later.

You must account for all amounts you received from your employer during the year as advances, reimbursements, or allowances. This includes amounts you charged to your employer by credit card or other method. You must give your employer the same type of records and supporting information that you would have to give to the IRS if the IRS questioned a deduction on your return. You must pay back the amount of any reimbursement or other expense allowance for which you don’t adequately account or that is more than the amount for which you accounted.

Travel advance
You receive a travel advance if your employer provides you with an expense allowance before you actually have the expense, and the allowance is reasonably expected to be no more than your expense. Under an accountable plan, you are required to adequately account to your employer for this advance and to return any excess within a reasonable period of time.

If you don’t adequately account for or don't return any excess advance within a reasonable period of time, the amount you don’t account for or return will be treated as having been paid under a nonaccountable plan (discussed below).

Unproven amounts
If you don’t prove that you actually traveled on each day for which you received a per diem or car allowance (proving the elements described in Table 5-1), you must return this unproven amount of the travel advance within a reasonable period of time. If you don’t do this, the unproven amount will be considered paid under a nonaccountable plan (discussed later).

Per diem allowance more than federal rate

If your employer's accountable plan pays you an allowance that is higher than the federal rate, you don’t have to return the difference between the two rates for the period you can prove business-related travel expenses. However, the difference will be reported as wages on your Form W-2. This excess amount is considered paid under a nonaccountable plan (discussed later).

There's more, but again, this gets you started. Head to IRS Publication 463 for all the details. When you follow this trail, you realize why UT's process is so onerous. We don't have any other choice. 

(If you've read to this point, you might want to consider a career with the Internal Revenue Service!) 

Nonaccountable Plans

A nonaccountable plan is a reimbursement or expense allowance arrangement that doesn’t meet one or more of the three rules listed earlier under Accountable Plans.

In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan.

• Excess reimbursements you fail to return to your employer.

• Reimbursement of nondeductible expenses related to your employer's business. See Reimbursement of nondeductible expenses, earlier, under Accountable Plans.

An arrangement that repays you for business expenses by reducing the amount reported as your wages, salary, or other pay will be treated as a nonaccountable plan. This is because you are entitled to receive the full amount of your pay whether or not you have any business expenses.

If you aren’t sure if the reimbursement or expense allowance arrangement is an accountable or nonaccountable plan, ask your employer.

Reporting your expenses under a nonaccountable plan

Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a nonaccountable plan with your wages, salary, or other pay. Your employer will report the total in box 1 of your Form W-2.

To summarize: The university is required to report to the IRS all income amounting to $600 or more paid to each non-employee individual (independent contractor) during a single calendar year - for participating in research studies or surveys. IRS regulation is here.

The university's Participant Study Cash Advance policy is here, including details about IRB Human Subject requirements. 

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