Accountable Plans: How & Why to Set One Up

Nov 6

Have you ever paid for business expenses personally and wondered if you can still get a deduction? Or maybe you have employees that pay for expenses that are business related, and you want to reimburse them? If this is you, an accountable plan is the solution you’re looking for.

What is an accountable plan?

An accountable plan is a fancy term for “reimbursement policy”. It allows employers to reimburse the business owners or employees for business expenses that were paid personally.

The benefit is that the business gets a deduction for the expenses, and reimbursements are not taxable to the employee. You’re using pre-tax dollars to pay expenses instead of after-tax dollars.

When to utilize an accountable plan

Accountable plans are a good solution when:

Business owners or employees pay for business expenses personally.
You have expenses that are part personal and part business (e.g. phone, travel, vehicles, home office, etc.).

Accountable Plans vs Non-Accountable Plans

For a plan to qualify as "accountable," it must meet 3 key criteria:

Business Connection: The expenses must be directly related to the business. Personal expenses do not qualify. If you reimburse your employees for expenses that are not business related, that will be considered taxable income and needs to be reported as wages.
Substantiation: Employees must provide adequate documentation (receipts, invoices, etc.) to substantiate the expenses. This includes keeping records of the amounts spent, the time and place of the expenses, and the business purpose.
Return of Excess: If an employee is reimbursed more than the actual expenses incurred, they must return the excess amount to the employer. This typically only happens when the cash is given in advance of incurring the expenses.

If a plan does not follow these IRS requirements for an accountable plan, that is considered a non-accountable plan. For non-accountable plans, reimbursements for expenses are considered part of the employees’ compensation and must be reported as regular wages on their W-2. The expenses are still tax deductible for the business, but are taxable to the employee and also subject to payroll taxes.

How to Set Up an Accountable Plan

To implement an accountable plan, employers should follow these 3 steps:

Create a Written Policy: Outline the types of expenses covered, the documentation that is required, and the reimbursement process. Click here to view a sample policy.
Communicate the Plan: Inform employees about the plan and ensure they understand the requirements.
Keep Accurate Records: Maintain records of reimbursements and employee submissions for compliance purposes. Employees should submit an expense report with details and documentation for everything that needs to be reimbursed. Click here to view an expense report template.

Note: You technically don’t even need a written policy, but it’s always recommended for continuity and in case you need to substantiate it in the future (i.e., if you get audited).

Processing the Reimbursements

When processing the reimbursements, it’s important that employee expenses are properly reported to the employer in a timely manner, and any overpayments or excess reimbursements must be returned to the employer within a reasonable time period.

You can either give the money to your employees in advance or reimburse them after the expenses are incurred. It’s typical to have deadlines outlined in the plan, and employees need to return any unused funds that were given in advance.

The standard deadlines that the IRS recommend are:

If you’re giving the employees cash in advance, don’t do it more than 30 days before they pay or incur the expenses.
Employees should report and provide documentation within 60 days after the expenses are paid or incurred.
Employees should return any excess cash that was given in advance within 120 days after the expenses were paid or incurred.

If the reimbursements are made after the expenses are incurred, it should happen regularly. Monthly is the most common, but at least quarterly. It’s not recommended to reimburse in December for expenses that were incurred in January.

Best Practices

Remember, the expenses must be business related in order to be eligible for reimbursement under an accountable plan. A business-related expense refers to expenses that are paid in the course of running a business that are ordinary (common and accepted in the industry) and necessary (helpful or appropriate for the business) for its operation.

For expenses that are 100% business related, it’s always best to just run it through your business account if possible. Obviously, this can be difficult when dealing with employees, but giving them access to a company debit or credit card can be a good alternative.

For partial business expenses, simply multiply the business use percentage by the total cost. For example, if you use your car 60% for business and 40% personal, you can get reimbursed for 60% of the costs or 60% of the total miles.

Accountable Plans in A Nutshell

Simply put, an accountable plan is a method for reimbursing business owners and employees for business expenses without triggering income tax on the reimbursements. For the reimbursements to be tax-free, they must meet certain IRS requirements, including being directly related to the business, properly documented in a timely manner, and any excess amounts must be returned.

If you have questions about how to set the plan up or what expenses qualify, it’s a good idea to consult with a tax professional. They can make sure the plan is properly set up, expenses are documented appropriately, and everything is substantiated in the event of an IRS audit.

An accountable plan is a simple and tax-efficient tool that helps to minimize taxes for both a business and its employees when utilized to the fullest extent.