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What is an Accountable Plan?
An accountable plan is a reimbursement policy or arrangement used by businesses to reimburse employees for business expenses without those reimbursements being treated as taxable income.
As a reminder to S corporation owners, you are both a shareholder and an employee. Therefore, when you are being reimbursed under an accountable plan, you are being reimbursed as an employee and not as a shareholder. See the “Tax Advantages” below.
For the plan to be considered accountable, it must meet specific requirements pursuant to IRC Section 1.62-2 (C)(2). The primary purpose of these plans is to simplify the process of reimbursing employees while ensuring tax compliance.
Key Requirements of an Accountable Plan
To qualify as an accountable plan, the reimbursement arrangement must meet the following three requirements:
Business Connection:
The expenses must have a business connection. This means that the expenses must be incurred while performing services as an employee.
Only expenses that are directly related to the business are eligible for reimbursement.
Substantiation:
Employees must substantiate the expenses within a reasonable period. This includes providing details such as the amount, time, place, and business purpose of the expenses.
Receipts, invoices, and other documentation must be provided to support the expenses.
Return of Excess Amounts: If the reimbursement exceeds the substantiated expenses, employees must return the excess amounts within a reasonable period.
The plan should outline the timeframe for returning any excess reimbursements.
Benefits of an Accountable Plan
Tax Advantages:
Reimbursements made under an accountable plan are not subject to income or payroll taxes.
Employees do not have to report these reimbursements as income on their tax returns.
Simplified Record-Keeping:
Clear guidelines and documentation requirements help streamline the process of expense tracking and reimbursement.
Compliance: Adhering to IRS guidelines ensures that the business remains compliant with tax regulations, reducing the risk of audits and penalties.
Implementing an Accountable Plan
Develop a Written Policy:
Draft a clear and comprehensive reimbursement policy that outlines the business connection requirement, substantiation process, and the procedure for returning excess amounts.
Include details on acceptable expenses, documentation requirements, and deadlines for submission and return of excess amounts.
Communicate with Employees:
Educate employees about the accountable plan and its requirements.
Provide training on how to properly document and submit expenses.
Establish a System for Substantiation:
Implement a system for employees to submit expense reports and supporting documentation.
Ensure that the system allows for easy tracking and review of expenses.
Monitor Compliance: Regularly review expense reports and documentation to ensure compliance with the accountable plan.
Address any discrepancies or non-compliance issues promptly.
Example: Expense Reimbursement Process
Expense Incurred:
An employee incurs a business-related expense, such as home office, mileage, travel, meals, cell phone, dues & subscriptions, office supplies, etc.
Submission of Documentation:
The employee submits an expense report along with receipts and a detailed explanation of the business purpose.
Review and Approval:
The business reviews the submitted documentation to ensure it meets the substantiation requirements.
Reimbursement:
Once approved, the business reimburses the employee for the substantiated amount. Again, reimbursements made under an accountable plan are not subject to income or payroll taxes.
Return of Excess Amounts:
If the reimbursement exceeds the substantiated expenses, the employee must return the excess amount within the specified timeframe.
It should be noted that reimbursing an expense does not change the deductibility of the expense itself. For instance, meals may be reimbursed at 100% of the cost, even though the expense is only 50% deductible by the company. Entertainment expenses are no longer deductible at all under the TCJA (Sec. 274(a) (1). If an employer reimburses entertainment expenses under a nonaccountable plan, the reimbursement must be treated as wages (Regs. Secs. 1.62(c)(5) and 1.62-2(d).
Conclusion
Implementing an accountable plan can provide significant benefits for both businesses and employees. By following IRS guidelines and establishing clear policies and procedures, businesses can ensure compliance, simplify the reimbursement process, and provide tax advantages to their employees. To learn more about how an accountable plan can benefit your business, contact Fleming Advisors, LLC by emailing info@fleming-advisors.com.
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