I have a client that owns an S Corp who uses his personal vehicle for business. He kept a mileage log in 2004, but has not yet reimbursed himself through the company. The corporation is a cash basis taxpayer. Can the corporation reimburse him in 2005 for the 2004 mileage expenses? Am I correct in saying that he would be reimbursed at the 2004 rate of 37.5 cents per mile?
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Reasonable Period of Time
In order for reimbursements to be tax-free to the recipient, it has to be reimbursed under an accountable plan. According to IRS Pub 535, one of the rules say the employee must adequately account to the employer the expenses within a reasonable period of time. If the expenses are not accounted for within a reasonable period of time, then the employer must include the reimbursement in the employee’s income, and the employee would then have to take a deduction for the expense that is being reimbursed.
In your case you have an S corporation shareholder that drives his personal vehicle for business, and then has the S corporation reimburse the use at the standard mileage rate. If it is done under an accountable plan, the S corporation takes a tax deduction for the reimbursement, the shareholder does not have it included on his W-2, and the shareholder does not have to take a deduction for the business use of the car on the 2106.
But if it is done under a non-accountable plan, the S corporation would include the reimbursement on the shareholder/employee’s W-2 as taxable wages. The S corporation still gets a tax deduction for the reimbursement in the form of wages paid. The shareholder reports the income on his 1040, but then would have to take a deduction on Form 2106 for the business use of his car, which would then be subject to the 2% AGI limitation.
Obviously not as desirable as an accountable plan.
So the real question is: Is this an accountable plan? Is waiting until the summer of 2005 to adequately account mileage records driven in 2004 considered to be within a reasonable period of time?
The answer is no.
IRS Pub 535 goes on to define reasonable period of time. It says:
REASONABLE PERIOD OF TIME. A reasonable period of time depends on the facts and circumstances. Generally, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time.
1. You give an advance within 30 days of the time the employee incurred the expense.
2. Your employees adequately account for their expenses within 60 days after the expenses were paid or incurred.
3. Your employees return any excess reimbursement within 120 days after the expenses were paid or incurred.
4. You give a periodic statement (at least quarterly) to your employees that asks them to either return or adequately account for outstanding advances and they comply within 120 days of the date of the statement.
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