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IRS Throws a Monkey Wrench in the Works

Typically, employers provide the tools that their employees need or they reimburse them for the cost of tools that staff buys on their own. If things are handled correctly, the reimbursements are tax-free to employees and deductible by the employer.

However, in a new Revenue Ruling, the IRS says that amounts must be properly substantiated under an “accountable plan.” Otherwise, the payments to employees are taxable. Employees cannot simply estimate the amounts—even if the estimates are reasonable.

The facts: As a condition of employment, the technicians in an auto repair shop were required to provide and maintain certain tools for auto repairs and maintenance. Each technician received a “tool allowance” in addition to his or her regular wages.

The tool allowance was an hourly rate based on data from a national survey of average tool expenses for auto mechanics and information on questionnaires provided by the technicians. They did not have to substantiate the claims made on the forms. In addition, the employer did not require the technicians to return amounts above the actual tool costs incurred. Result: The IRS determined that this arrangement did not constitute an accountable plan, so the reimbursements are taxable.

What does this outcome mean for your company? You may have to implement new accounting procedures to avoid any tax complications. See your professional tax adviser for the best approach for your situation.

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