IRS Recognizes Employee Tool and Equipment Plans

The IRS recently issued a Coordinated Issue Paper that sets out its view of what constitutes an acceptable Employee Tool and Equipment Plan.

An Employee Tool and Equipment Plan is an agreement between an employer and one or more of its employees to reimburse the employee for the use of the employee’s tools and equipment. The idea is that a portion of the compensation paid to the employee is for use of his tools and equipment and, therefore, that portion is not taxable wages to the employee.

In addition to saving the employee federal income taxes, the employer would not have to withhold employment taxes on that portion of the employee’s compensation. As the IRS’s Coordinated Issue Paper points out, taxpayers can achieve this tax result by structuring the Employee Tool and Equipment Plan as an “Accountable Plan” pursuant to Code Sec. 62(c).

To qualify as an Accountable Plan, the Plan must meet some very minimal requirements. Specifically, the Plan must require the employee to substantiate the expense and the Plan must provide that the employee must return any amount in excess of the amount of the expense that is substantiated.

The IRS Coordinated Issue Paper is directed at the Motor Vehicle Industry. It addresses tools purchased by employees in this industry. Accountable Plans can be used by taxpayers in other industries and for expenses for items other than tools.

The IRS Coordinated Issue Paper is also directed at Employee Tool and Equipment Plans that are “marketed” to employers. The Paper explains how the IRS will view these marketed plans. Assuming that the plans meet these IRS requirements, it appears that more taxpayers should be taking advantage of this tax savings opportunity.