US Tax Treatment of Expense Accounts
In the United States, 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 receipts. 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 deductions, 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.
Read more about this topic: Expense Account
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