In its most recent ruling on employer reimbursement for auto mechanics’ tools, the IRS has held that a particular tool reimbursement plan is a –nonaccountable plan,” meaning that all tool allowances paid to mechanics under the arrangement are taxable income and subject to federal employment taxes.
The IRS determined that the plan did not meet all three accountable plan requirements to be treated as tax-free. While the described arrangement did meet the business connection requirement, it failed to meet the substantiation and return of excess payments requirements.
The IRS noted that a reasonable estimate of expenses is no substitute for substantiation of actual expenses.
Although the ruling is limited to the facts involved in this particular arrangement, NADA warns it should serve as a reminder for dealers to carefully review tool plans with their tax practitioner before adopting them.A link to the decision (Revenue Ruling 2005-52) is available at www.nada.org (on the home page under Special Features).
Download Bulletin PDF