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Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year, Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel.

What amount should be reported in Mel's gross income for the year?

a. $0
b. $3,600
c. $1,200
d. $4,800

Answer :

Final Answer:

Mel's gross income for the year is $3,600. This accounts for the excess reimbursement that was refunded to Easel, reducing the taxable amount, thus the correct option is b.

Explanation:

Let's break down the scenario step by step:

1. Reimbursement and Nonaccountable Plan:

- Mel receives $400 per month for business automobile expenses, totaling $4,800 for the year. This amount is considered a reimbursement.

- The plan is nonaccountable because Easel does not require employees to provide proof of expenses and allows them to keep any unspent amount.

2. Business Expense Incurred by Mel:

- Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, which is the IRS standard mileage rate at the time.

- Calculation: 12,000 miles * $0.30/mile = $3,600.

3. Excess Reimbursement:

- The excess reimbursement is the difference between what was reimbursed and the actual business expense incurred.

- Calculation: Total reimbursement - Business expense incurred = $4,800 - $3,600 = $1,200.

4. Refund to Easel:

- Mel returns the excess amount of $1,200 to Easel. This refund indicates that Mel is giving back the portion of the reimbursement that was not used for business expenses.

5. Tax Implications:

- Under a nonaccountable plan, the entire reimbursement is considered taxable income. However, any portion refunded back to the employer reduces the taxable income.

6. Gross Income Calculation:

- Initial reimbursement: $4,800

- Business expenses incurred: $3,600

- Excess reimbursement (to be refunded): $1,200

- Gross Income = Initial reimbursement - Excess reimbursement (to be refunded) = $4,800 - $1,200 = $3,600.

Mel's gross income for the year is $3,600 (option b). This is because the initial reimbursement was higher than the actual business expenses incurred, and the excess amount was refunded to Easel.

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