What Is a Reimbursable Expense? Definition & Examples

Reimbursable expenses represent a common aspect of business operations, where individuals incur costs on behalf of their organization and are subsequently repaid. These financial arrangements are prevalent across various professional settings, allowing employees to cover necessary business-related expenditures without personal financial burden.

Understanding Reimbursable Expenses

An expense qualifies as reimbursable when it is directly connected to business activities, serves a legitimate purpose, and is deemed reasonable in amount. The Internal Revenue Service (IRS) defines such expenses as “ordinary and necessary” for an employee’s job duties. An “ordinary” expense is one that is common and accepted within a particular industry, while a “necessary” expense is considered helpful and appropriate for the business, though not necessarily indispensable. Companies establish policies outlining what expenses meet these criteria, often including spending limits and required documentation. Reimbursements are distinct from personal expenses, which are not eligible for repayment, ensuring that only costs benefiting the business are covered.

Common Reimbursable Expense Categories

Many expenses are commonly reimbursed due to their direct connection to business operations. Travel expenses frequently fall into this category, covering costs like airfare, hotel accommodations, and ground transportation when employees travel for work. Meals and entertainment during business travel or client meetings are also typically reimbursable, though often subject to specific spending limits and a clear business purpose. Office supplies, professional development activities like conferences or training, and membership fees for professional organizations are often covered.

The Reimbursement Procedure

The process for seeking reimbursement begins with documentation. Individuals must retain proof of purchase, such as itemized receipts or invoices, for each expense. These documents should clearly show the date, vendor, amount spent, and the business purpose of the expenditure. Understanding company-specific policies regarding submission deadlines is also important.

Once all documentation is gathered, the individual completes an expense report, either a physical form or through an online system. This report details each expense, attaching the supporting receipts and explaining its business purpose. The completed report is then submitted to the appropriate department, such as accounting or a manager, for review and approval. After approval, reimbursement is processed through direct deposit or a check.

Tax Considerations for Reimbursements

The tax implications of expense reimbursements depend on whether an employer operates under an “accountable plan” or a “non-accountable plan.” An accountable plan requires expenses to have a business connection, be adequately substantiated with documentation within a reasonable timeframe, and any excess reimbursement must be returned within a reasonable period. Under an accountable plan, reimbursements are not considered taxable income to the employee and are not subject to payroll taxes. This means the reimbursed amounts are excluded from the employee’s gross income and do not appear on their W-2 as wages.

Conversely, a non-accountable plan does not meet these requirements. In such cases, reimbursements are treated as taxable income to the employee and are subject to income tax withholding, Social Security, Medicare, and unemployment taxes. These amounts are included in the employee’s wages on their W-2 form. Employers can still deduct the business expense portion, but the entire reimbursement amount is considered taxable to the employee if the plan is non-accountable.