IRS Issues Guidance on Tool Plans

In some industries, employees are required to bring their own tools to work as a condition of employment. Auto repair shops are a prime example. Employers of such businesses often partake in an “accountable plan” that is designed to allow the employer to compensate the employee for using his own tools, in a manner that is tax free to the employee. To qualify, the expense reimbursement plan must meet a three part test: there must be a “business connection” between the expense incurred by the employee in purchasing the tool, and the service the employee provides to the employer; “substantiation” for the expense, which entails far more than a copy of a receipt; and a provision that any excess paid to an employee above what is substantiated, is returned to the employer.   To view the full announcement from the IRS, click here.