An Accountable Plan is an arrangement for reimbursing employees for work-related costs in a way that meets IRS requirements and allows the reimbursed amounts to be treated as nontaxable income. Without an accountable plan, reimbursement for employee expenses is considered part of the employee’s compensation and therefore subject to withholding and reporting on the employee’s W-2 form.
In the past, some employee out-of-pocket expenses were deductible on employees’ personal tax returns. The 2017 law known as the Tax Cuts and Jobs Act (TCJA) disallowed this deduction for out-of-pocket expenses by employees on their personal tax returns. By properly claiming and documenting reimbursements, the accountable plan allows reimbursements to not be taxable to the recipient.
How an Accountable Plan Works
The first caveat about the accountable plan is that the expenses must be business-related and incurred within the course of employment. They must be adequately accounted for and reported, and any excess reimbursement must be returned within 120 days. Employers must retain dates, times and the business purpose for every expense.
Business-related expenses incurred by employees may include travel, meals, lodging, entertainment and transportation and any of the following:
• Travel expenses (either actual or per diem)
• Gas or mileage expenses (either actual or per diem)
• Tools and supplies
• Home office, including depreciation
• Cell phone
• Internet
• Training and development
• Dues, subscriptions and professional licenses
Entertainment expenses are no longer deductible at all under the TCJA, including:
• Nightclubs
• Cocktail lounges
• Theaters
• Country clubs
• Golf and athletic clubs
• Sporting events
• Hunting and fishing
If an employer reimburses entertainment expenses, the reimbursement must be treated as wages.
If an expense involves both a personal use and a business use, the cost must be split between the employer and the employee. For example, if a personal car is used for business trips, the employee needs to account for the miles that were incurred for personal transportation and for work-related transportation, splitting the costs appropriately.
Expenses are subject to third-party confirmation via review of related documentation, such as receipts. Exceptions to this rule may include non-lodging costs that amount to less than $75, meal reimbursement that falls within IRS per diem standards, and transportation costs for which obtaining an official proof of payment is difficult (such as taxis and public transportation).
Requirements for an Accountable Plan
While employers are not required to submit the details of their plan to the IRS, they must be able to demonstrate that they meet the IRS requirements. Employers may choose to implement stricter accountable plan requirements than are posted by the IRS.
Accountable plans do not have to follow the nondiscrimination rules applicable to other employee benefit plans. For example, a business can choose to reimburse an owner for a home office, but not other employees. An employer can have different arrangements with different employees.
Car expenses can be reimbursed using the IRS mileage rate. However, the elements of the business driving (date, mileage, destination, etc.) must be reported to the employer using an expense account report, app or other written record.
Expense advances can be made to employees for anticipated expenses within 30 days of when the expense is to be paid or incurred. The expense must be substantiated within 60 days after it is paid or incurred, and repayment for any overpaid advance must be made within 60 days after the expense is paid or incurred. Alternatively, businesses can utilize quarterly reports tracking these advances, reimbursements and repayments.
The accountable plan does not need not be in writing, but a written document provides a structure to ensure that the required elements are addressed.
A written expense reimbursement policy should clarify:
• The time period for employees to submit expenses
• The process for requesting reimbursement, including what documents are required
• The process for returning excess reimbursements or allowances
• The types of expenses that are reimbursable
• The maximum allowable amounts for certain expenses
• Any preferred suppliers to be utilized for potential expense reduction
As with many IRS regulations, the requirements to qualify for tax-free reimbursement of expenses may not be clear-cut. Your CPA can help you collect and document the information required for an accountable plan in order to satisfy IRS requirements.
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