It is important for tax-exempt organizations to be aware of tax laws and regulations related to business expenses which apply to them. One such business expense is mileage. The IRS previously announced the optional standard mileage rate of 65.5 cents per mile effective January 1, 2023. This rate provides the rate employees can be reimbursed for automobile travel without causing tax implications either for their employees or the tax-exempt organization employers.
Tax-exempt organizations offering reimbursement of mileage and other business expenses should have an accountable plan. Accountable plans, outlined in Treasury Regulation § 1.62-2, allow the payment of the reimbursement of the business expense to be made without the payment being considered taxable income to the recipient. To qualify, the reimbursed expenses must have (1) a business connection, (2) substantiation and (3) return of excess.
Here’s an illustration on how to meet these requirements as it relates to the mileage expense. The expense must be deductible under the Internal Revenue Code for it to have a business connection. An employee incurring a mileage expense for travel to a work conference or other work-related function by automobile, for example, would likely be a deductible business expense under the Internal Revenue Code and would have a business connection. To substantiate this expense, the employee must submit information on the actual mileage of the trip (i.e., date, time, place and purpose as well as number of miles travelled). The information provided by the employee for the substantiation should be kept with the tax-exempt organization’s financial records. It is a good idea for tax-exempt organizations to have an expense sheet which can be completed by employees to identify the information needed to meet this substantiation requirement. The last requirement, return of excess, is relevant when a tax-exempt organization provides an employee an advance of funds to cover the mileage. Should that occur, the employee would need to return any excess funds which remain after reimbursement is taken for the number of actual miles traveled.
While the accountable plan need not be a written policy, it must be an established policy adopted at a board meeting or through unanimous written consent of the board outside of a meeting. If there is no established accountable plan, the tax-exempt organization would have a nonaccountable plan. Expense reimbursements made under a nonaccountable plan would be taxable income to the employee and could give rise to tax consequences to the tax-exempt organization.
Note that the accountable plan would also apply to reimbursements to the board of directors and certain volunteers of the tax-exempt organization who are incurring expenses related to their service for the tax-exempt organization.
Mileage is only one example of business expenses where a tax-exempt organization may need to reimburse its employees, directors or volunteers. Other expenses, such as meals and lodging, require a more involved analysis under the Internal Revenue Code and the regulations thereunder. For more information on business expenses for tax-exempt organizations and accountable plans, please contact our office.
