An employer may exclude a business expense reimbursement from income if the employee's expenses are:

The correct choice indicates that an employer can exclude a business expense reimbursement from an employee's income when the expenses are business-related, substantiated, and excess advances are returned in a timely manner.

This aligns with the IRS regulations regarding accountable plans for reimbursements. For a reimbursement to not count as taxable income, the employee must provide proof that the expenses were for business purposes and must be able to substantiate them appropriately. This typically involves submitting receipts or other documentation that demonstrates the expense was necessary for the performance of their job duties.

Moreover, the requirement for excess advances to be returned in a timely manner is crucial. If an employee receives a reimbursement for expenses they have not actually incurred, or if they receive more than what they spent on business-related expenses, they must return any excess to ensure that the reimbursement remains non-taxable. This process prevents employees from effectively receiving a windfall from the reimbursement, which could happen if they retain excess funds that were not used for actual business purposes.

Thus, meeting all these criteria supports the tax-exempt status of the reimbursement, which benefits both the employer and the employee by ensuring compliance with tax laws and avoiding potential tax liabilities.