Phone: 630-495-2282 Fax: 630-495-2260 Map/Directions
 

IRS denies tax-free status to techs’ tool reimbursement plan

November 22, 2010

A particular tool reimbursement plan, the Internal Revenue Department ruled recently, is a "non-accountable plan," meaning that all tool allowances paid to mechanics under the arrangement are taxable income and subject to federal employment taxes.

 

In its most recent ruling on employer reimbursement for auto mechanics’ tools, the IRS held in Revenue Ruling 2005-52 that the reimbursement plan did not meet all three accountable plan requirements to be treated as tax-free.  Dealers should review their own plans to insure compliance with IRS regulations.

 

In order to be tax-exempt, reimbursements for expenses generally must meet three requirements:

 

  • The payments must be reimbursements for expenses that would be allowable as business deductions and are paid in connection with an employee’s performance of his duties; and
  • The employee must substantiate the actual expense and that it relates to the employer’s business; and
  • The employee must be required to return to the employer any excess payments within a reasonable period of time.

 

While the described arrangement did meet the business connection requirement, it failed to meet the substantiation and return of excess payments requirements. The service noted that a reasonable estimate of expenses is no substitute for substantiation of actual expenses.

 

The plan had reimbursed employees for tools based on a combination of a national survey of average tool expenses combined with the employee’s responses to an annual questionnaire.

 

The full text of Revenue Ruling 2005-52 is available at www.ustreas.gov/press/releases/reports/ruling.pdf

 

Back