If you are operating your own business, you may pay certain business-related expenses by yourself occasionally. You can certainly claim reimbursement from the company.
Your expectation is to let your company reimburse you so that the business expenses can be deducted properly in the company’s books and tax returns. Also, there shouldn’t be any income tax impact on the amount you received as reimbursement.
Your thought is correct if you go through a proper way to receive reimbursement. However, the consequence of any improper reimbursement will be as follows:
- You paid for the business expense by your own fund
- Your company pays you back
- IRS challenges such payment to you as W-2 income instead of reimbursement
- You need to pay both income tax and employment tax for the “additional W-2 income”, and you get no way to deduct the original business expenses you paid.
I am sure the above consequences scared you. This article will help you understand how to reimburse yourself properly!
I recommend you do the following to protect yourself from any violation of the reimbursement rules:
Legitimate Business Expense – the expenses paid by you must be related to the business, and it has to be ordinary and necessary.
Substantiation Requirement – receipts should be turned in to support the reimbursement. Ideally, a monthly expense report should be prepared to state the business purpose of the reimbursement. If the expense is related to your vehicle use for the business, a mileage log sheet should be turned in for the company to substantiate the payment
Reasonable Time – the reimbursement should be paid monthly to you.
Setup an Accountable Plan – it is an expense reimbursement arrangement that states the rules so that the employees can claim the expenses properly. Although IRS does not require you to keep this in writing, I recommend you retain one in writing for yourself to follow.
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