If you often reimburse employees for job-related expenses they incur, accountable plans can offer significant benefits. Accountable plan reimbursements are not taxable to the employee and are fully deductible by the employer, with the exception of meal and entertainment expenses.

In one particular Field Service Advice (FSA), the IRS addressed the reimbursement of expenses of couriers. The couriers picked up and delivered packages in a certain geographic area. The employees used their own vehicles and the company reimbursed them for such use and paid them for their mileage expenses. However, the expense reimbursements were not based on the employees’ actual expenses but rather a percentage of their commissions were to be allocated to wages and a percentage to equipment rental (i.e., use of the employees’ vehicles). The employees were not required to submit mileage or expense documentation to the employer. The employees’ wages were reported on their W-2s and the expense reimbursements were reported on Form 1099s.

The IRS found that since the employees did not report their actual expenses to the employer, the reimbursements were not part of an “accountable plan,” so the full amount reported on the 1099 was subject to employment taxes.  While this FSA involved a delivery service, the rules apply to all businesses. Although some exceptions exist, it’s best to either include the full amount in wages, or require employees to submit detailed expense reports for reimbursement under an accountable plan. Reimbursements must be for job-related expenses that the employee would reasonably expect to incur, and the employee must provide substantiation and return any excess reimbursements within a reasonable period of time.

Personally earned income can’t simply be reported on a corporation, partnership, etc. tax return, or vice versa. Compensation for services (whether wages, salaries, commissions, profit-sharing, pension, etc.) is taxable to the person who earns it. You can’t escape taxation by arrangements and contracts to share earnings
or to have them paid to someone else.

In a recent case, the taxpayer maintained that commissions were his S corporation’s income–not his sole proprietor income. The Court found that the taxpayer failed to carry his burden of establishing that he had a valid business arrangement with the S corporation under which he was required to, and did, pay the commissions to the corporation.

If a debt you owe is forgiven by the creditor, or you settle the debt for less than the
full amount, the canceled portion is taxable income to you. However, there are exceptions and exclusions. Canceled Debt that Qualifies for Exception to Resulting in Gross Income:
● Amounts specifically excluded from
income by law such as gifts or bequests
● Cancellation of certain qualified student
loans
● Canceled debt that if paid by a cash
basis taxpayer is otherwise deductible
● A qualified purchase price reduction
given by a seller
Canceled Debt that Qualifies for Exclusion
from Gross Income:
● Cancellation of qualified principal
residence indebtedness
● Debt canceled in a Title 11 bankruptcy
case (Chapters 7, 11, 12, and
13)
● Debt canceled due to insolvency
● Cancellation of qualified farm indebtedness
● Cancellation of qualified real property
business indebtedness (other
than C corporations)

Banks, other financial institutions, and certain government agencies generally must
report debt discharges (partial or complete) on Form 1099-C, Cancellation of Debt, if the discharge is $600 or more.