Reimbursable describes a cost that one party pays out of pocket and that another party is obligated to pay back. It is the adjective of the verb reimburse, to pay back or compensate another party for money spent or losses incurred (American Heritage Dictionary), so the plain synonym is repayable. In a US firm it says whose account a cost lands on rather than what it was spent on: an employee’s business expense the employer repays, or a cost the firm advances on a client’s behalf and recovers on the invoice.
The label settles nothing about the books on its own. A reimbursable cost is an outlay first, and it becomes somebody’s expense only as it is used up, the split set out in expenditure.
What Makes an Employee Reimbursement Nontaxable
Whether the repayment is taxable to the employee turns on the arrangement, not on what the money bought. An accountable plan is an arrangement that meets three requirements: business connection, substantiation, and returning amounts in excess of expenses (26 CFR 1.62-2(c)(1) and (c)(2)(i)).
Amounts treated as paid under an accountable plan are excluded from the employee’s gross income, are not reported as wages or other compensation on the employee’s Form W-2, and are exempt from the withholding and payment of employment taxes and of income tax (26 CFR 1.62-2(c)(4)). Where the arrangement itself misses one of the three, every amount paid under it is nonaccountable: included in gross income, reported as wages on Form W-2, and subject to withholding (26 CFR 1.62-2(c)(3)(i) and (c)(5)).
The Three Conditions of an Accountable Plan
Business connection means the arrangement covers only business expenses that are allowable as deductions and that the employee paid or incurred in performing services as an employee. An amount paid regardless of whether the employee incurs, or is reasonably expected to incur, expenses of that type fails this one, and everything paid under that arrangement is nonaccountable (26 CFR 1.62-2(d)(1) and (d)(3)(i)).
Substantiation means each business expense is substantiated to the payor, which the regulation defines as the employer, its agent or a third party, within a reasonable period of time. For expenses outside section 274(d) the information submitted has to identify the specific nature of each expense and let the payor conclude it is attributable to the payor’s business activities, so broad categories such as travel, or vague terms such as miscellaneous business expenses, do not qualify. Travel away from home sits inside section 274(d) and needs the amount, time, place and business purpose (26 CFR 1.62-2(b), (e)(1), (e)(2) and (e)(3)).
Returning amounts in excess of expenses means anything advanced above what the employee substantiates comes back within a reasonable period of time, which depends on the facts and circumstances. One safe harbor, the fixed date method, puts dates on it. An advance made within 30 days of when an expense is paid or incurred, an expense substantiated to the payor within 60 days after it is paid or incurred, or an amount returned to the payor within 120 days after an expense is paid or incurred will be treated as having occurred within a reasonable period of time (26 CFR 1.62-2(g)(2)(i)).
Where the arrangement meets all three and only the employee is late returning an excess, the failure splits the payment rather than sinking it, because only the amounts not exceeding the substantiated expenses stay under the accountable plan (26 CFR 1.62-2(c)(2)(ii)), and the rest carries withholding no later than the first payroll period after the reasonable period ends (26 CFR 1.62-2(h)(2)(i)(A)).
Reimbursable Costs Billed to a Client
A cost a firm incurs on a client’s behalf and recovers on the invoice is a different animal, and none of that machinery reaches it, because the regulation governs an arrangement with an employee for expenses of employment rather than a charge between two businesses (26 CFR 1.62-2(b)). The engagement terms decide whether the client owes the cost, and whether it is recovered at the amount actually incurred, the basis set out in actuals, or at a fixed allowance agreed in advance.
Reimbursable, Deductible and Billable
These three answer different questions. Reimbursable is about who owes the money back. Deductible is about what a return allows against income, and an employee’s business expenses reach adjusted gross income only through a narrow set of named exceptions, one of which is expenses reimbursed under an employer arrangement (26 U.S.C. 62(a)(2)(A)).
Billable is what the firm may charge a client for, usually time at an agreed rate and often at a margin. A reimbursable amount is the agreed repayment of a cost somebody already carried, so it can sit on the same invoice as billable time and behave nothing like it.
Common Questions
Repayable. The verb behind it means to repay money spent, or to pay back or compensate another party for money spent or losses incurred (American Heritage Dictionary).
Reimbursable, one word, no hyphen, ending in able rather than ible. The dictionary carries it as a run-on adjective under the entry for reimburse (American Heritage Dictionary), so the spelling follows the verb.
The costs somebody other than the person who paid them is to repay. On the payroll side the arrangement decides whether the repayment stays out of wages, and a state statute can impose the duty whatever the arrangement says: California requires an employer to indemnify an employee for all necessary expenditures or losses incurred in direct consequence of the discharge of the employee’s duties (California Labor Code 2802(a)). On the client side the engagement terms decide whether they are recovered at all.
Accountably places trained offshore accountants inside US CPA and EA firms, and a firm can put a real block of its own expense and payroll work through a trial task before anything client facing depends on it.
