Why are expense reimbursements taxable after 90 days?
Per IRS regulations, employees must submit business and travel expenses for reimbursement to the employer within a reasonable period of time following the incurrence of the expenses. Otherwise, the reimbursement is taxable to the employee. These rules also apply to non-employees requesting reimbursement.
The IRS has indicated that requiring an employee to submit an expense for reimbursement within 60 days of the incurrence of the expense meets the reasonable period of time test. See additional information from external tax advisors.
After considering relevant factors, including benchmarking of peer institutions, financial and sponsor reporting obligations, IRS-related information, and the frequency of faculty and staff travel, the university determined that to comply with IRS requirements it will require employees to submit business and travel expenses for reimbursement by the university within 90 days of incurring the expense or completing the travel. The standard university practice is to reimburse after the business trip is completed; however, the departments have the ability to permit reimbursement of airfare prior to the trip. For cases where individuals are requesting reimbursement prior to the trip, the department is responsible for tracking the information to ensure that the trip occurred.
As a result, any request for reimbursement of an expense submitted more than 90 days following the date the expense was incurred or the travel was completed, will be treated as taxable to the employee and subject to income and withholding taxes, if approved, for payment. If the request for reimbursement is submitted after 90 days by a non-employee who is also a non-resident alien, the amount will be reported on a 1042-S and may be subject to income tax withholding. If the request is for a non-employee who is a U.S. citizen, the payment may be reportable on a Form 1099-MISC if the individual’s income from the university in the calendar year exceeds $600.
Does an expense report need to be approved within 90 days to avoid taxation?
The latest Oracle submission date is used to determine if a report was submitted after 90 days. If a report is submitted into Oracle on day 90, but it is not approved until day 91, it will not be considered late. If a report is submitted in Oracle on day 90, but it is withdrawn and re-submitted on day 91, it will be considered late and will result in tax consequences.
It is recommended that all expenses be submitted for reimbursement within 30 days after the travel is completed or the expense is incurred to allow time for processing and approvals.
Is the university exempt from all taxes?
No, the university is not exempt from all taxes. For example, the university is not exempt from the following types of taxes: hotel occupancy/room taxes, Allegheny County Alcohol Beverage Tax, Vehicle Rental Tax, and Telecommunications/excise taxes.
In addition, the university is not exempt from sales tax in all states for all purchases. For example, even though the university is generally exempt from Pennsylvania state sales tax, it still must pay sales tax on some types of purchases (e.g., purchases for an unrelated trade or business). If a state is not listed below, the university is either not exempt from the applicable sales tax or the state does not impose a sales tax:
Colorado, Connecticut, D.C., Florida, Illinois, Kansas, Maine, Maryland , Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, Ohio, Pennsylvania, Tennessee, Texas, Utah, Virginia, West Virginia
The Pennsylvania sales tax exemption certificate [.pdf] can be found on the Taxation website. If you need an exemption certificate for a state other than Pennsylvania, please contact Taxation at TaxDept@andrew.cmu.edu.
Does the policy allow colleges/departments to reimburse sales tax?
Carnegie Mellon University is a non-profit corporation that has been granted U.S. federal tax-exempt status under Internal Revenue Code Section 501(c)(3). However, state sales taxes are imposed by the individual states, and not the U.S. federal government.
The university has separately applied for and received a state sales tax exemption in several states, which allows the university to purchase certain goods and services in those states without paying sales tax.
To increase the university’s purchasing power and maintain compliance with its federal sponsor requirements, it is critical for the university to leverage its sales tax exemptions to minimize the cost of purchases when possible. However, the university is only exempt from sales tax on purchases made directly by the university, which would include purchases made by purchase order (PO), purchasing card (PCard), university contract, etc. University purchases made with personal funds are not exempt from sales tax; therefore, a university sales tax exemption certificate should never be presented when making a purchase for the university with personal funds.
Purchases made by individuals for university business needs may be reimbursed sales tax, if the department approves, but should be limited for the above reasons. Employees who are traveling for university business purposes are eligible for reimbursement of sales tax paid on their business travel expenses.
Can I use the university’s sales tax exemption certificate when making business purchases with personal funds?
No. Doing so puts the university at risk for losing the relevant sales tax exemption or receiving a financial penalty.
What if a supplier does not honor the sales tax exemption?
Sales tax exemption is a courtesy and suppliers are not obliged to honor it. If the supplier does not honor the sales tax exemption, individuals should contact Taxation at TaxDept@andrew.cmu.edu for assistance as the refund process varies by state.
Who should I contact if I have questions on the taxability of a gift?
Consult Taxation at TaxDept@andrew.cmu.edu for specific questions regarding taxability of gifts.