Pursuant to Treasury Regulation § 1.274-5T(h), the payment of business expenses through a reimbursement or other expense allowance arrangement is excludable from income by a contractor if the expenses are substantiated to the payer by the contractor under an accountable plan.
“Business expenses” means ordinary and necessary expenses for travel, transportation, and entertainment that are deductible under Internal Revenue Code section 162.
To be properly substantiated under an accountable plan, the reimbursement must be paid only if receipts are furnished to substantiate the expenses or the expenses are allowed under an acceptable per diem arrangement.
Those reimbursed or direct-billed business expenses that are not taxable pursuant to the above-cited regulation because they have been properly substantiated are not subject to the 4% withholding.
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