SECTION 4. EMPLOYEE

TREATMENT OF RIG-RELATED EXPENSES

Q-16. May an employee exclude from income amounts reimbursed and deemed substantiated under this revenue proce- dure?

Q-17. May an employee claim deduc- tions for rig-related expenses that exceed amounts reimbursed under an account- able plan or deemed substantiated under this revenue procedure?

Q-18. May an employee treat pay- ments made under a nonaccountable plan as if they were made under an account- able plan by voluntarily substantiating expenses and returning any excess to the employer?

Q-19. May an employee deduct any rig-related expenses that exceed those reimbursed by an employer and deemed substantiated under this revenue proce- dure on Schedule C, Profit or Loss From Business?

Q-20. May an employee deduct any rig-related expenses that exceed those

2002–23 I.R.B. 1099 June 10, 2002

ment or other expense allowance arrangement that meets three requirements under § 1.62–2: business connection, substantiation, and return of amounts in excess of substantiated expenses. The business connection requirement is satisfied if the arrangement provides advances, allowances or reimbursements only for business expenses allowable as deductions under §§ 161–198 that are paid or incurred by an employee (or that the employer reasonably expects the employee to incur) in connection with the performance of services as an employee. The substantiation requirement is satisfied if the arrangement requires each business expense to be substantiated to the employer within a reasonable period of time. The return of excess requirement is satisfied if the arrangement requires the employee to return to the payor within a reasonable period of time any amount paid under the arrangement in excess of the expenses substantiated. A nonaccountable plan is a reimbursement or other expenses allowance arrangement that does not satisfy one or more of the three requirements.

Q-6. What are the tax consequences to an employee when an employer reim- burses expenses under a nonaccountable plan?

A-6. Generally, § 162(a) allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including the trade or business of being an employee. Under § 1.62– 2(c)(5), amounts treated as paid under a nonaccountable plan are included in the employee’s gross income, must be reported as wages on the employee’s Form W–2, and are subject to withholding and payment of income and employment taxes (Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), and income tax withholding). See also Employment Tax Regulations §§ 31.3121(a)–3 (FICA); 31.3306(b)–2 (FUTA); 31.3401(a)–4 (income tax withholding); and Income Tax Regulation § 1.6041–3(h)(1) (return of information exemption) (for exemption from reporting requirements for payments made under an accountable plan before January 1, 2001, see § 1.6041–3(i)(1)). The employee may still deduct the expenses. However, those deductions may

reimbursed by an employer and deemed substantiated under this revenue proce- dure on Schedule E, Supplemental Income and Loss?

Q-21. May an employee deduct expenses that an eligible employer has already reimbursed under an accountable plan?