How Do Accountable Plans Work?

Are you a business owner looking for ways to reimburse employees (or yourself) for work expenses without triggering extra taxes? An accountable plan could be your answer. In this article we’re breaking down how accountable plans work, what the IRS requires, and how they can help you save money by keeping reimbursements tax-free. Whether you’re curious about qualifying expenses or looking to streamline your business, we’ve got you covered.

What’s an Accountable Plan?

An accountable plan allows employers to pay back employees for business expenses. This way, the tax authorities do not tax the reimbursements. The business gets to deduct the expenses, and the employees (or owner-employees) receive the money tax-free.

But, it’s important to know that not just any reimbursement plan qualifies. You’ll need to follow certain IRS accountable plan rules to make sure those reimbursements stay non-taxable.

How to Qualify for an Accountable Plan

To make sure your reimbursement setup qualifies as an accountable plan, you need to meet three key requirements:

1. Business Connection: The expenses need to be work-related. This means that any money you reimburse should come from what you spent while performing services as an employee.
2. Proof of Expenses: Employees must provide proof of their expenses. This can include receipts or invoices. They also need to report details like the amount, time, place, and business purpose. You should complete this within a reasonable time.
3. Return of Excess Reimbursements: Employees must return any extra money to the employer. This applies if the reimbursement is more than the actual expense.

Without meeting these requirements, the IRS could treat the reimbursements as taxable income, which isn’t what you want!

Common Expenses Covered by Accountable Plans

Here are some examples of expenses that can be reimbursed under an accountable plan:

1. Mileage and auto expenses
2. Travel costs (like airfare and hotels)
3. Business meals
4. Office supplies
5. Home office expenses (for businesses that aren’t sole proprietors)

Do You Need a Written Policy?

Technically, you don’t need a written policy to have an accountable plan, but it’s a good idea. A written policy helps ensure everyone stays on the same page and that you’re following IRS rules. It should include:

1. Time limits for submitting reimbursement requests
2. Required documentation (like receipts)
3. How to handle returning excess reimbursements
4. What types of expenses are eligible
5. Any maximum reimbursement limits

Special Cases and Exceptions

While accountable plans generally have strict guidelines, there are some notable exceptions and special cases to consider. For instance, meal reimbursements can be handled differently when using IRS per diem rates. These rates provide set daily limits for meal expenses, which simplify the documentation process by removing the need for detailed receipts. This can be especially beneficial for businesses with employees who travel frequently, allowing them to adhere to a standardized reimbursement process without excessive paperwork.

Another important exception is the timeline for returning excess reimbursements. Under an accountable plan, if an employee receives more than the actual cost of their expenses, they are required to return the excess funds within a specified period—typically within 120 days. This ensures that the plan remains compliant with IRS regulations and continues to provide the associated tax advantages.

Why Use an Accountable Plan?

So why go through the hassle of setting up an accountable plan? Here are the main benefits:

• Lower Taxes: Reimbursements aren’t counted as taxable income, which reduces the business’s taxable income.
• Self-Employment Tax Savings: If you own a business and work for it, an accountable plan can help reduce your self-employment taxes.

A Few Considerations to Keep in Mind

Like any business strategy, there are some things to watch out for when using an accountable plan:

• Recordkeeping: You’ll need to keep good records of all the expenses and reimbursements. Fortunately, there are apps like MileIQ that can help simplify this process.
• No Double Dipping: Ensure you haven’t already claimed the reimbursed expenses as deductions through other tax strategies.

Potential Conflicts with Other Tax Strategies

While accountable plans can be a great way to reimburse employees and business owners for work-related expenses, they can sometimes overlap or conflict with other tax strategies. Understanding how these interactions might affect your tax filings is important. Here are some common examples:

1. Home Office Deduction: If you’re a business owner who uses the home office deduction, there’s potential for overlap. For example, if your business reimburses you for home office expenses like utilities or internet under an accountable plan, you cannot also claim these as deductions on your personal tax return. Double-dipping is not allowed, so it’s important to decide whether the home office deduction or accountable plan reimbursement is more beneficial in your situation.
2. Business Travel Expenses: Accountable plans can reimburse employees or owners for travel expenses, but be careful if you also plan to deduct these costs on your business return. For instance, if you’re reimbursed for business travel under an accountable plan, you cannot then deduct those same expenses separately on your personal tax return. Ensure that travel costs are either reimbursed through the accountable plan or deducted directly by the business, but not both.
3. Business Meal Expenses: Meal expenses can also present a conflict. Under an accountable plan, meal reimbursements must adhere to IRS rules, such as the 50% limit on deductions for business-related meals. However, there are exceptions, like per diem rates, which don’t require detailed receipts. If your business has reimbursed meal costs through an accountable plan, they should not also be deducted as business expenses on a tax return. The business needs to choose between treating the meal expenses as part of the accountable plan or using other methods for meal deductions.

Who Can Use Accountable Plans?

Most types of businesses can use accountable plans, including:

1. Sole proprietorships (Schedule C)
2. Rental income businesses (Schedule E)
3. Farming income businesses (Schedule F)
4. S Corporations
5. C Corporations
6. Partnerships

Key Points to Remember

When considering an accountable plan, keep these important points in mind:

1. Compliance is Key: Make sure every reimbursed expense is properly documented. The IRS might reclassify your reimbursements as taxable wages if you’re not careful.
2. Good Documentation: Keep thorough records of every reimbursement. Showing a clear connection between the expense and the business is important.
3. A written reimbursement policy: This can make it easier to follow the rules, even though it’s not required. It also ensures everyone understands the guidelines.
4. Tax Strategy: Consider how the accountable plan works with your other tax strategies. This can help you save money and avoid problems.

Got Questions About Accountable Plans? We’re Here to Help.

Whether you already have an accountable plan, want to implement one, or simply have questions, give us a call to schedule your consultation. Speak with a real attorney and get trusted answers tailored to your business. We’re here to make sure you’re maximizing your savings and staying compliant with IRS regulations.