Final answer:
For a business expense reimbursement to be excluded from an employee's income, it must be for business-related expenses that are substantiated, and excess advances must be returned in a timely manner. This ensures compliance with IRS rules for an accountable plan.
Step-by-step explanation:
An employee's reimbursement may be excluded from income when certain conditions are met regarding their business expenses. The correct answer is that an employer (ER) may exclude a business expense reimbursement from an employee's (EE) income if the expenses are business-related, substantiated, and any excess advances are returned timely. This aligns with accountable plan rules set forth by the Internal Revenue Service (IRS), which stipulate these requirements to ensure that the reimbursements are not taxed as income.
Regarding payroll, it's not necessary for the reimbursements to be made with regular payroll—they can be made separately. However, it's crucial that the expenses are indeed related to the business, that the employee provides proof or substantiation for these expenses, and any funds advanced beyond the substantiated expenses must be returned to the employer within a reasonable timeframe to maintain the exclusion from income.