Those requirements, discussed in more detail, are business connection, substantiation and return of excess.

Business Connection: Expenses incurred by an employee for services performed for the business.

Substantiation: Documentation regarding the incurred expense to “substantiate” the reimbursement.

Return of Excess: If the employer gives the employee an advance for business expenses but the documentation that substantiates the expenses is less than the advance, the difference needs to be returned to the employer.

Let me give you an example that will explain all three requirements.

You drive your personal car for business (business connection). You will need to provide a log listing the date, time, miles driven, and business purpose (substantiation). The employer then will calculate the miles using the applicable federal business standard mileage rate. This reimbursement is excluded from wages and is not taxable to the employee. It is a business deduction for the business. Now, if the employer provided $250 a month as an automobile allowance and the miles calculated only came to $225, the employee will need to return to their employer $25 (return of excess).