To Be Accountable or Not To Be Accountable, that is the question.
Do you reimburse yourself for business expenses you pay with out-of-pocket? What about your employees? If so, keep reading, because you may want to consider adopting an Accountable Plan in your business and reap all the tax rewards that go along with it.
How does the IRS Define an Accountable Plan?
In order to be an accountable plan, your policy must meet three (3) requirements set by the IRS.
- The expenses must have a business connection. Expenditures incurred as a direct result of performing job related duties are reimbursable. Personal expenses are not reimbursable. Expenses can be both personal and business in nature. A personal vehicle used for business is the most common example of this. You must allocate the amount attributable to each.
- Supporting documentation has to be submitted to the employer within 60 days of incurring the expense. The typical documentation comes in the form of a receipt; however, there are other sources like an email or registration forms that provide similar substantiation. There are some exceptions to this requirement that can be found on page 25 of the IRS publication 463.
- Advances made in excess of incurred expenses be returned within 120 days of receipt incurring the expense.
What is a Nonaccountable Plan
Simply put, a nonaccountable plan consists of reimbursements made outside of the IRS requirements stated above. For example, if you require receipts but only reimburse employees quarterly, you are utilizing a nonaccountable plan
When is a Reimbursement Taxable
Failure to meet IRS requirements create a taxable event. In this case, reimbursements are taxable must be reported on the employees’ W-2 forms. They are also subject to payroll taxes. If the employee itemizes their deductions they may be eligible to deduct the expenses.
When made in accordance with the IRS requirements of an accountable plan, reimbursements are not taxable. In this case, there is no taxable event for the employee and the employer may deduct the amounts as a business expense.
How do you Implement an Accountable Plan?
With the exception of the requirements and exclusions stated above, the IRS does not provide guidelines for implementing an accountable plan. Technically it doesn’t even have to be in writing; however, it is best practice to put it on paper. This way the employer, the employee, the bookkeeper, and the accountant are all on the same page regarding the subject.
Companies must determine which expenses will be eligible for reimbursement. The most common are mileage, lodging, travel expenses like parking and tolls, and meals. Other expenses may inlcude small tools, uniforms, and training events. Review last year’s figures in each business-related expense category to decide which will be reimbursed. While not required, I highly suggest adopting a written policy at this point.
Now, create an expense report to be used by everyone requesting reimbursement. The template will detail each expense, including the purpose and amount.
Are You Accountable?
What expenses you reimburse, whether the plan is writing, and what reporting vehicle you use is entirely up to you. The important thing to remember is in order to be accountable you have to meet ALL three (3) of the guidelines set by the IRS.
If you reimburse yourself and/or your employees and are not sure if your current record keeping on those transactions is sufficient, contact us and will be happy to review it with you.