Which combination allows an employer to exclude a business reimbursement from income?

• A. reimbursements are made with regular payroll
• B. expenses are substantiated and excess advances are returned timely
• C. expenses are business-related, substantiated, and excess advances are retained for future travel
• D. expenses are business-related, substantiated, and excess advances are returned timely

Answer: (D)

Reimbursements can be excluded from income only when they come under an accountable plan. That means three things must be satisfied: the expenses are for a business purpose, the employee substantiates the expenses with receipts or adequate records, and any excess of an advance is returned to the employer (or reconciled) within a reasonable time. When these conditions are met, the reimbursement isn’t treated as wages and isn’t taxed as income.

This is why the best option is the one where the expenses are business-related, properly substantiated, and any excess advances are returned timely. It aligns with the requirements of an accountable plan and allows the reimbursements to be excluded from income. The other scenarios fail to meet one or more of these conditions: using regular payroll tends to convert reimbursements into wages; substantiation plus timely return without confirming a business purpose isn’t sufficient on its own; and retaining excess advances for future travel doesn’t require timely return, so it doesn’t qualify.