A written policy helps administer reimbursements, but writing alone does not satisfy the rules. Employees need records of the expense and its business purpose. IRS timing safe harbors commonly include substantiation within 60 days and returning excess advances within 120 days; reasonable periods can also depend on the facts.
The underlying expense must qualify and must not be deducted twice. A sole proprietor’s own expense deduction is different from employee reimbursement. More-than-2% S-Corp shareholder health insurance follows separate W-2 and deduction rules.
An example
Hypothetical: an employee submits a dated log for 1,000 eligible business miles driven in August 2026. Reimbursement of $760 under a qualifying arrangement generally is excluded from wages. A flat allowance without required substantiation is different.
Reviewed October 7, 2026. IRS reference ↗
This is a general reference. Discuss how the rules apply to your business with your tax professional.