Accountable Plans for Reimbursing Employees
An accountable plan is an employee reimbursement allowance arrangement or a method for reimbursing employees for business expenses that complies with IRS regulations.
If your business has an accountable plan, the reimbursement of certain business expenses is not taxable to the employee. If your business reimbursement plan doesn't comply with IRS requirements for an accountable plan, these reimbursements are taxable to the employee, and withholding of federal income taxes and payroll taxes must be made on these payments. In addition, you as the employer must report these payments on the employee's W-2 form.
Accountable plans may include reimbursement for a number of different employee expenses, including:
The accountable plan also must include a procedure requiring employees to return excess reimbursements (those in excess of allowable amounts) to the employer. If an employer sets up and maintains an accountable plan, employee travel expenses do not have to be treated as taxable income.
Allowable Plan Requirements
In order to be considered an "accountable plan" by the IRS, your arrangement must include ALL of the following:
- The expenses must have a business connection; that is, they must have been paid or incurred while performing services as an employee.
- The employee must adequately account to the employer for these expenses within a reasonable time. You must require employees to provide you with detailed information on these expenses, including date, time, place, amount, and business purpose for the expense.
- You must require the employee to return excess reimbursements within a reasonable and specific period of time, depending on the circumstances.
If all three of these requirements are not met, the plan is determined by the IRS not to be accountable, and any expenses reimbursed to the employee by your business are taxable to the employee.
Excess reimbursement is reimbursement greater than allowable amounts. If the employee doesn't return excess reimbursements within a reasonable period of time, these excess amounts are taxable to the employee. The most common circumstance would be a case in which you give an employee an advance before she leaves for a trip, and her expenses during the trip are less than the amount advanced.
A reasonable period of time for a return of excess reimbursements is determined by the IRS as, for example:
- An advance received within 30 days of the time of the expense.
- The employee furnishes an adequate account of expenses within 60 days after they were paid or incurred.
- The employee returns any excess reimbursement within 120 days after it was paid or incurred.
- The employee is given a statement (at least quarterly) that request return or adequate accounting for outstanding advances, and the employee complies within 120 days after receiving the statement.
Submitting an Accountable Plan to the IRS
No, there's no requirement that you submit a written plan to the IRS. But you should be able to prove you have defined your requirements for reimbursing employees for expenses. You will need something in writing to show the IRS that you understand what an accountable plan is and that you are operating your business to the requirements.
First, you need to put these requirements in writing, as part of your employee policy and procedures manual.
Second, you should document all transactions with employees for their reimbursements of expenses, keeping records to show that all requirements of the accountable plan were followed.
Accountable Plan Affect and Business Taxes
Whether these expenses are made within an accountable plan doesn't directly affect your ability to deduct these expenses on your business tax return. But you still must provide adequate documentation to prove these expenses were business-related.
For travel reimbursements, for example, you can deduct the expense on the appropriate line on your business tax return. For example, for meals and entertainment expenses, use line 24b of Schedule C (for sole proprietors or single-member LLC's.)