Revenue Ruling 2012-25

The Internal Revenue Service issued a revenue ruling to clarify to businesses when the business-connection rule was applicable to certain reimbursement or allowance plans. Under the business-connection rule, the Internal Revenue Code allowed for certain business expenses to be deducted when paid by an employee in connection with services rendered for an employer under an accountable reimbursement or allowance arrangement. In situation one, Employer A employed technicians to install cable-television services and required the technicians to provide their own tools. Employer A paid the technicians hourly wages and accounted for the technicians providing their own tools. Employer A decided to reimburse the technicians for their tools under a new tool plan. Under the tool plan, Employer A determined a set amount to reimburse each technician, split that amount over the technician’s anticipated hours, and paid the amount monthly over a 12-month period. Additionally, under the tool plan, Employer A paid the technicians a lower hourly rate until tool reimbursement was paid in full. Once paid in full, the technicians received a higher hourly rate. Employer A treated the reduced hourly wage as taxable income and the hourly tool rate as a nontaxable reimbursement. In situation two, Employer B employed nurses on short-term assignments across the country. The nurses were paid an hourly wage regardless of whether the nurse was near the nurse’s tax home. If the nurse traveled away from his tax home, he received a portion of his income as a nontaxable per diem allowance for lodging, meals, and incidental expenses rather than receiving the entire wage as taxable income, as he would have if he were near his tax home. In situation three, Employer C employed commercial construction workers in a major metropolitan area. Some workers were required to travel between construction sites in their personal vehicles as part of their duties. Employer C paid all workers hourly and flat-rate nontaxable mileage reimbursement regardless of whether the worker traveled for business in his personal vehicle. In situation four, Employer D employed cleaners to perform residential cleaning services. The cleaners were required to provide the products and equipment necessary to complete the cleaning services. Employer D paid the cleaners an hourly wage and took into consideration products and equipment costs. Employer D decided to lower the hourly wage and offered the cleaners the option to have the product and equipment costs reimbursed as nontaxable reimbursements. All cleaners received the lower hourly wage regardless of whether they submitted their costs for reimbursement. The hourly wage was treated as taxable income to the cleaners.