Disbursement vs Reimbursement: Differences & Tax Implications

Disbursement vs Reimbursement: Differences & Tax Implications

What is disbursement?

A founder makes a disbursement when they pay another individual or business. If the founder is acting as an agent, then they can also make disbursements on behalf of someone else. It is the money you’re temporarily passing through your business, but it isn’t truly yours. You’re acting as an agent for another party, facilitating a transaction they’re ultimately responsible for.

When you make a disbursement, the benefit, obligation, and tax liability of the transaction belong to your client, not to your company. You’re the middleman, handling payment logistics, not consumption.

Tax authorities care more about how your payment behaves in practice than what you call it. All disbursement payments follow certain criteria.

• You’ve received explicit or implicit permission from your client to make the payment.
• The third-party supplier knows who the true buyer is (your client).
• The supplier’s invoice is usually issued in the client’s name, not yours.
• You charge your client exactly what you paid on their behalf.

Examples of disbursements

To understand how disbursements work in real life, here are a few examples of disbursements.

• Insurance claim payouts to hospitals: An insurer disburses funds directly to a hospital for a policyholder’s treatment. The benefit accrues to the policyholder, not the insurer.
• Procurement cards and purchasing agents: A purchasing agent pays suppliers using client funds strictly for approved purchases.
• Consultancies covering visa or permit fees: A consulting firm pays government visa or work permit fees for a client’s employees, later recovering the exact amount.

In each case, your business never owns the expense. That’s what keeps the payment outside taxable income. When you act as a financial agent, your role is custodial, not transactional. That distinction changes how disbursements appear on your books, keeping them out of taxable expenses.

What is reimbursement?

A reimbursement, on the contrary, is when you pay back the expenses someone has already incurred. Unlike a disbursement, the spender was the principal, the direct beneficiary of the service or product.

The spender is reclaiming money for something they directly consumed or required in the course of business. This can be an employee, a contractor, or even a partner. Additionally, many businesses reimburse their customers for faulty products or unsatisfactory services. Most founders batch reimbursement requests monthly to control cash flow and simplify payroll reporting.

Characteristics of a reimbursement

• The ownership of the expense belongs to whoever incurred it.
• Reimbursements always compensate for something already purchased or spent.
• Employees or individuals must submit receipts or expense reports before approval.
• The business evaluates legitimacy before repayment.

Real-world examples of reimbursement

• Employee travel costs: Flights, meals, taxis, or fuel during a business trip.
• Office supplies: An employee buys a printer for remote work and claims reimbursement.
• Insurance repayments: A person pays a medical bill upfront and later receives reimbursement from the insurer.

In all of these scenarios, the payment is returning funds to a spender—not forwarding them to a third party. This seemingly small distinction forces different accounting and may incur taxes at the initial purchase.

Key differences between disbursement and reimbursement

Ensuring that you don’t treat a disbursement as a reimbursement (or vice versa) can keep your profit & loss statements clean and avoid triggering unnecessary tax liabilities.

Disbursement vs Reimbursement: Tax Implications

For the IRS, disbursements are taxable but not reimbursements. Ensure that the following documents and trail are present for either to be marked under the tax to get maximum benefits.

Disbursement criteria for tax compliance

While there is no specific mandate to consider a payment as a disbursement, especially by an agent, the Internal Revenue Service Exemption Organization (IRS EO) lists certain criteria to determine that an agent/principal relationship is established for tax exemptions.

• A written agreement must be made designating the agent as such for the principal.
• Third parties receiving payment from the agents are aware of the principal and that the business is on their behalf.
• The agent’s acts are legally binding to the principal.
• The income that the agent receives in exchange for goods and services of the principal is attributed as such, rather than an agent fee/charge.
• The goods or services are billed under the principal’s name, not the agent’s.
• The Principal has the right to approve or control the agent’s activity related to the payment, including inspecting the books, approving the agent’s publication, and approving the agent’s budget.
• The principal bears the risk of loss in the transaction.
• The agent must keep a meticulous record of each payment, which includes the amount, date, payee, and purpose of the transaction.
• The disbursement expense must be added separately from the agent’s service fees on an invoice to the principal to ensure correct tax treatment. This is because the disbursement is not the agent’s income, but the fee is.

If one or more of these don’t apply, the payment likely counts as a reimbursement. This means it’s subject to Sales/Use Tax. Classifying disbursements correctly from the beginning will save you a lot of time and effort on corrections later during audits.

Reimbursements and IRS accountable plan rules for employees

While IRS accountable plan rules do not apply to independent contractors, they do affect the general employer-employee relationship, where reimbursements are a major part. Complying with the IRS accountable plan rules gives tax benefits to your employees while helping founders avoid any payroll tax liabilities. Under this, the IRS requires the employees making the payment to meet the following three criteria:

1. The employee must prove their connection to the business they are paying for.
2. The employee must provide timely and substantial proof of expense, generally within 60 days of the expense.
3. For normal or per diem reimbursements, employees must return any excess or unsubstantiated amount to the employer.

Meet these criteria to give your team the tax benefits on their wages. If your team members fail to meet these criteria, the expense is counted as an unaccountable plan, under which all the reimbursements will be considered as taxable wages and will be subject to payroll taxes and withholding.

Specialized types of disbursements and reimbursements

From disbursing government grants to paying salaries to your employees, not all disbursements or reimbursements are the same. Understanding their subtypes can standardize your processes and avoid internal confusion.

Types of disbursements:

• Controlled corporate disbursement: Used in corporate banking, where banks provide daily reports of checks to help businesses manage cash flow proactively.
• Loan disbursement: A payout of borrowed funds. Positive disbursement means money leaves the institution to the borrower; negative disbursement means funds are returned or canceled.
• Recurring disbursements: Regular outgoing payments such as rent, salaries, or monthly subscriptions.

Types of reimbursements:

• Per diem: Fixed daily allowance given to employees traveling for business. No receipts are required if amounts remain within policy.
• Mileage reimbursement: Payments made per mile for employees using personal vehicles for work.
• Tuition reimbursement: Educational assistance programs where employers cover eligible learning expenses for employees.

Each subtype has distinct triggers, documentation requirements, and in some cases, tax exemptions. Choose the right subtype and keep your books uncomplicated.

How do different states treat disbursement vs. reimbursement?

Unlike most countries, the revenue taxes in the US differ from state to state. While almost all the states levy Sales and Use Tax, the obligations and the details often differ. Here’s a non-exhaustive list of how different US states treat disbursement vs reimbursement:

Different US state laws offer various benefits for startups. Select a location for your business that aligns with these tax laws to maximize benefits.

Managing cash flow easily

Most founders treat disbursement and reimbursement management as part of strategic financial hygiene. Using automation tools for reimbursement and disbursement can help manage expenses faster and accurately. It ensures that:

• You can capture invoices as they happen and see each payment land in the right category without manual checks.
• Create a clear segregation in disbursements from reimbursements using the names on the invoice and the internal employee cost center.

Automation reduces human error, speeds up reconciliation, and ensures every payment has the correct tax profile. It also gives founders real-time visibility into cash flow, enabling better decisions about liquidity and forecasting. At scale, founders rely on platforms like Rho, Aspire, and Slash to keep disbursements and reimbursements cleanly separated without manual checks.

Conclusion

Disbursement means paying for you, while reimbursement means paying you back. The distinction might sound purely linguistic, but to regulators and auditors, it defines whether you’re handling someone else’s money or spending your own.

For founders, understanding this divide is compliance and good business sense. Classifying all your line items correctly will improve margins, give higher tax benefits, and ultimately build investor trust.

Before finalizing payment structures or invoicing models, talk to your tax advisor who’s familiar with your jurisdiction’s rules—especially if you operate internationally. Laws in different US states may apply similar logic but differ in specific Sales & Use Tax obligations. Automating disbursements and reimbursements early protects margins, shortens audits, and keeps your financials investor-ready.

Disclosure: AFT US LLC, d/b/a Aspire, is a financial technology company, not a bank. The Deposit Account and banking services are provided by Column N.A., Member FDIC. FDIC deposit insurance covers the failure of an insured depository institution. Deposits in the Deposit Account are FDIC-insured through Column N.A., Member FDIC and Column's Sweep Program Network Banks. Certain conditions must be satisfied for pass-through FDIC insurance to apply.