Expense Reports & Reimbursement

Nonprofits commonly ask employees and volunteers to purchase goods and services on the organization’s behalf. A staffer might be asked to order food for a lunch meeting, for example. Organizations handle these transactions in a variety of ways:

• Give the individual cash in advance or a check for the purchase.
• Issue a company credit card.
• Provide a monthly allowance for discretionary purchases.
• Ask employees or volunteers to use personal funds, with the promise of reimbursement.

The Internal Revenue Service places all reimbursement plans into two categories: Accountable and Non-Accountable.

Accountable Plan: Collect Those Receipts

An accountable reimbursement plan includes these three elements:

• The purpose of the expense must be related to the organization.
• An employee or volunteer must return any excess money above the purchase cost, within 120 days of the advancement.
• The what, when, and where of an expense needs to be substantiated. Approved documents might include canceled checks, receipts, or credit card statements. Documentation should be submitted within 60 days of the purchase and be kept by the ministry for tax purposes.

Non-Accountable Plan: Add Amounts to Taxable Wages

A plan is considered non-accountable if an expense does not meet all three criteria of an accountable reimbursement plan. Examples of a non-accountable arrangement include:

• A flat-fee allowance for any expenses for which the employee does not have to provide receipts or return unused money.
• Mileage paid that exceeds the current standard mileage rate. The difference needs to be included in the employee’s taxable wages.

In most cases, amounts paid to employees under a non-accountable plan are considered wages subject to FICA, Medicare taxes, and income tax withholdings. For pastors, amounts may be treated as wages, but may not be subject to withholding.

Your organization can deduct a certain amount of substantiated expenses on its tax return. The way such business expenses are deducted depends on whether you follow an accountable or a non-accountable reimbursement plan.

For more details, you may wish to review IRS guidance on how to deduct business expenses. Two resources appear below.

Recommended Resources

• IRS Publication 535 (2020), Business Expenses
• IRS Fringe Benefit Guide