The IRS issues Revenue Ruling on Tool Reimbursement Plans
Is your dealership in compliance?
A recent IRS Revenue Ruling directed at dealers and other employers of automobile repair and maintenance businesses ruled that in order for a tool reimbursement plan to be tax-free to the employee the plan must meet certain requirements. The plan must meet both the substantiation and the return of excess requirements or it will not qualify as an accountable plan under which reimbursements are excluded from employees’ wages.
In the plan discussed in the ruling, the employer determined an hourly tool allowance by using data from a national survey of average tool expenses for automobile service technicians and specific information concerning tool-related expenses provided by the employees in response to a questionnaire. The employer reimbursed the employee based on hours worked requiring the use of tools but did not require evidence of actual expenses incurred, and did not require the employee to return reimbursements in excess of actual expenses within a reasonable time.
The ruling points out that an accountable plan must require employees to substantiate the actual expenses they are incurring. Employers may not substitute a reasonable estimate of expenses to be incurred based on statistical data and hours worked for the substantiation of actual expenses. An accountable plan must also require the employees to return any excess monies received within a reasonable period of time before or after receiving a periodic statement.
If a tool reimbursement plan does not meet substantiation or return of excess requirements, the arrangement is a non-accountable plan and all tool allowances paid under the arrangement must be included in the employees' gross income, reported as wages on the employees’ Forms W-2, and are subject to withholding and payment of federal employment taxes.
Please contact us if you currently have a tool reimbursement program or are considering adopting one.
