An accountable plan allows businesses to reimburse employees, owners, and shareholders for business expenses, including any home office expenses they incur.
What is an accountable plan?
An accountable plan is a document created by a business that outlines company policies on reimbursable business expenses for the employees. In other words, it’s a method of reimbursing employees for any business-related out-of-pocket expenses incurred by employees during the course of their work.
An accountable plan (or expense reimbursement plan) can also be considered as an alternative to home office deductions. Unlike self-employed individuals, a corporation or an LLC that has elected to be treated as a corporation does not qualify for home office deductions. Instead, they can reimburse employees, shareholders, and owners for the costs of a home office under an accountable plan and later deduct those expenses under the corporation’s return.
How does an accountable plan work?
According to the Internal Revenue Service, a corporation can set up an accountable plan and start reimbursing its employees if the expenses incurred by employees are related to the business and properly documented. A corporation can reimburse the actual expenses incurred or set an allowance per day (also known as per diem for certain expenses.
For example, if an employee is taking a business trip, the employer can opt one of two ways to reimburse the employee under an accountable plan. One way would be to provide the employee with an allowance amount ( i.e., a dollar amount per day that will be fully reimbursed by the employer ) prior to the trip. Alternatively, the employee can pay for the business travel expenses out-of-pocket during the trip and submit a reimbursement request upon returning.
Which types of expenses qualify under an accountable plan?
To qualify under an accountable plan, expenses must be incurred or paid in connection with an employee’s performance of service.
Some of the business-related expenses approved by the IRS may include:
- Home office expenses
- Travel expenses and meal expenses (actual or per diem rates)
- Car expenses, like gas or mileage (actual, per diem, or the standard mileage rate)
- Supplies and tool expenses
- Phone and internet expenses
- Dues, subscriptions, and licensing fees
However, not all business-related expenses are covered under an accountable plan.
In particular, entertainment, recreation, or amusement expenses, such as theater, country clubs, golf or athletic clubs, sporting events, hunting, fishing, nightclubs, and cocktail lounges cannot be reimbursed under an accountable plan.
If reimbursements are made for legitimate, properly documented business expenses, they are not taxable to the reimbursed employee. If employee reimbursements are not for legitimate business expenses or are not properly documented, though, they are considered taxable income and are subject to employment taxes.
What are the requirements of an accountable plan?
According to the IRS, an accountable plan must meet three requirements.
- The expenditures must have a business connection or business purpose, i.e., they were incurred or paid when performing duties as an employee
- The employee must adequately account to their employer for all expenses within a reasonable period of time. Generally, qualifying expenses must be claimed using an expense report and proper substantiation (usually in the form of receipts, canceled checks, or invoices)
- The employee must return any excess reimbursement or allowance (also known as an excess advance) within a reasonable period of time.
If the reimbursement arrangement does not meet the above requirements, the IRS classifies the plan as a nonaccountable plan (more on this later).
What is a reasonable period of time for substantiation or return of excess?
While IRS regulations don’t provide a concrete definition of a “reasonable period of time,” the IRS has provided safe harbors that can help inform your accountable plan.
- Any advance paid to employees should be made within 30 days of the time they incur or pay for the expense
- Adequately accounting for an expense must be made within 60 days of incurring or paying an expense
- If the advance was more than the actual expense, the employee should return the excess amount within 120 days of incurring or paying the expense
- If the employee is provided a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding allowances, they should comply within 120 days of the statement.
What is adequate accounting?
The IRS requires employees to “adequately account” for all the business expenses they incur while performing their duties. But what does this mean?
An adequate account is just a fancy way of saying a proper record of the amount, time, place, and purpose of the business expense. According to the IRS, this record can be in the form of a “statement of expense, an account book, a diary, or a similar record in which you entered each expense at or near the time you had it, along with documentary evidence (such as receipts) of your travel, mileage, and other employee business expenses.”
One way to gauge if your employee has adequately accounted for all business expenses is to examine whether they have submitted similar records and supporting documentation to you as they would to the IRS if the IRS were to question their deductions.
Best practices for an accountable plan
We highly recommend putting your accountable plan in writing, both for clarity and to be prepared in the event of an IRS audit.
An accountable plan is also a good way of ensuring that the IRS does not reclassify any owner-employee expenses reimbursed by the corporation as dividends or shareholder distributions.
Here’s what we recommend including in your accountable plan rules.
- A list of reimbursable expenses
- A defined timeframe for employees to report expenses (e.g., 10 business days after expenses incurred)
- The maximum reimbursable limit for each expense and/or guidance on how to calculate reimbursable expenses
- For home office expenses, the plan can specify a reimbursable amount based on the space required. For example, if the total size of the home is 100 sq ft, the office is 10 sq ft, and the monthly rent is $100, that would equal a reimbursement of $10 per month for the employee’s use of their home office. OR
- The employer could provide a monthly allowance for certain business expenses employees incur or pay while working from their home office.
- The process for requesting reimbursement and the documents required to submit a reimbursement request (e.g., expense reports, receipts, invoices, etc).
- A process outlining how employees can return excess reimbursements or allowances
Accountable plans and taxes
One of the advantages of an accountable plan is that reimbursements made to employees are not considered income. Therefore, they are not subject to payroll taxes and do not have to be included in an employee’s W-2. Additionally, all reimbursed business expenses are tax-deductible on the corporation’s return.
If, however, the IRS finds that your accountable plan did not meet all necessary requirements, it can consider the reimbursements paid under a “non-accountable plan.” This can happen if employees are reimbursed for non-eligible expenses, have not adequately accounted for all business expenses, or fail to return excess reimbursements within a reasonable period of time.
In such cases, any reimbursements will have to be included in the employees’ taxable income and be subject to payroll taxes. Additionally, the business would not be able to deduct those expenses on the business’s tax return.
How a Bench Tax Advisor can help
If you have any additional questions, Bench Tax customers get unlimited, on-demand access to tax consultations. Book a call with a Bench Tax Advisor—they’ll provide you with tips on how you can put together your own accountable plan.
As a growing small business, there may be many instances where owners, shareholders, or employees may pay for a business expense out of their pocket—and while reimbursing those expenses is important, so is remaining IRS-compliant.
An accountable plan ensures that businesses can make reimbursements in a way that benefits both the employee and the employer. If you’re ever in doubt, reach out to your CPA or a tax advisor to make sure that you are making the most out of your accountable plan.