[needcoffee]

Could anybody please explain to me why are we including the full amount in the gross income? The answer says that “the $4,800 will be included as part of Mel’s taxable wages on Mel’s W-2”, which I understand, but then the question says that Mel encloses a check for $1,200 to refund the overpayment, which is basically the money he did not use. What am I missing? Is Mel refunding the money and then getting a deduction for that amount? That’s the only thing I can think of because otherwise he’s paying taxes on money he doesn’t have.

Thanks so much!

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Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel. What amount should be reported in Mel’s gross income for the year?

a. $4,800

b. $1,200

c. $0

d. $3,600

Explanation

Choice “a” is correct. Under a nonaccountable plan, $4,800 ($400 per month x 12 months) must be reported as part of Mel’s gross income for the year (in fact, the $4,800 will be included as part of Mel’s taxable wages on Mel’s W-2).

Rule: Under a nonaccountable plan (i.e., expenses are not reported to the employer), any amounts received by an employee from the employer must be reported by the employer as part of wages on the employee’s W-2 for the year (and subject to income tax withholding requirements). The gross amount received is reported as income.

Rule: Any expenses taken against the gross amount received in a nonaccountable plan (e.g., the car mileage expenses and the reimbursement to the company) are considered miscellaneous itemized deductions and are subject to the 2% AGI limitation.

Note: The examiners have attempted to trick the candidate into thinking that this is in some way an accountable plan because they provided for a return of excess funds received to the employer. However, remember that the question specifically states that the plan is nonaccountable.

Choices “c”, “b”, and “d” are incorrect, per the above rules.

"It's choice not chance that determines your destiny".

[OlintoJr]

A non-accountable plan is to be treated as income, as it is not required to be returned to the employer. In this question Mel is an idiot… he should have kept the 1200. Just because he gave it back to the company does not mean he will be allowed to deduct it though. He is essentially gifting the money back to them.

I think you are overthinking this.. you really just need to know the rule. Non-accountable = fully taxable no matter how the money is spent.

Good Luck

FAR - 11/30/14 -79
AUD - 2/19/15 -86
BEC - 4/09/15 -86
REG - 11/30/15 -87

I'M DONE! ITS OVER! WOOOOOOO!!!!!!!

[needcoffee]

@OlintoJr Thanks for your helpful explanation!

"It's choice not chance that determines your destiny".

[Anonymous]

@needcoffee

To add to @OlintoJr explanation; I found the following explanation on my notes: ” Any expenses taken against the gross amount received in a nonaccountable plan (i.e. the car mileage expenses and the reimbursement to the company) are considered miscellaneous itemized deductions and are subject to the 2% AGI limitation”.

[Anonymous]

@needcoffee

To add to @OlintoJr explanation; I found the following explanation on my notes: ” Any expenses taken against the gross amount received in a nonaccountable plan (i.e. the car mileage expenses and the reimbursement to the company) are considered miscellaneous itemized deductions and are subject to the 2% AGI limitation”.

[Author]

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