Posted by Fred Lake

What Is An Accountable Plan?

What Is An Accountable Plan?

An accountable plan is a plan that complies with the Internal Revenue Service (IRS) rules for reimbursing workers for business expenses if the reimbursement is not considered income. This means that refunds are not subject to withholding tax or the W-2 declaration. However, these expenses must be linked to your business to be included in an accountable plan.


Key points to note

  • Accountable plans are not taxable as they are not considered a form of employee compensation.

  • An accountable plan is a means of reimbursing employees for labor costs.

  • Costs can only be deemed part of an accountable plan if they are accurately reported, business-related, and reimbursed in excess.

  • If a reimbursed cost is uncountable, it is taxed by the IRS. Surplus funds generally must be returned within 120 days.


How does an accountable plan work?

An accountable plan is different from a non-accountable plan. Suppose a company's reimbursement plan does not meet the IRS requirements for an accountable plan. In that case, the plan is not accountable, and reimbursement of expenses is considered part of the employee's compensation. Therefore, it is subject to withholding and must be declared on the W-2 Form.

According to IRS rules, in an accountable plan, expenses are reimbursed if they are business-related and properly accounted for. Also, amounts paid more than the actual costs must be returned to the company within a certain period. Employees' business expenses may include travel, food, accommodation, entertainment, or transportation. Employees are required to properly record registration fees and reimburse excess refunds within a reasonable time.

Employers are not required to submit plan details to the IRS but must demonstrate that they meet an accountable plan's requirements.

Employers can generally use more stringent scheduling requirements than those published by the IRS.

An accountable plan has three necessary characteristics:

  • Expenses must be commercially related. These must be incurred while the employee provides services to or on behalf of the employer.

  • The employee must adequately report his expenses to the employer within a reasonable time.

  • The employee must refund any excess reimbursement within a reasonable time.

These characteristics require explanation to ensure that the plan meets established requirements.


Business Connection: Expenses must be incurred during employment. Personal expenses are not reimbursable(or deductible) business expenses. Personal expenses are personal, household, or family expenses.

If an expense is partially business and partly personal, it should be shared between the two. A common example is a personal vehicle, which is also used for business purposes. Commercial use of the vehicle is a deductible (or refundable) expense.

According to the TCJA, the reimbursement of an expense does not affect the expense deductibility. One of these expenses, entertainment, is no longer deductible under the new tax legislation. If an employer reimburses an employee for entertainment expenses, the reimbursement must be included in the employee's salary.


Adequate Accounting: Employees should perform proper accounting within a reasonable period.

What do we mean by "proper accounting"? Employees must prove that they spent the money for legitimate business reasons.

Usually, evidence provided by third parties, such as receipts, is sufficient. Suppose it is not obvious on the cover of the document. In that case, the employee should record the activity's purpose, the reason for the expense, location, the date, and other parties involved, such as providing entertainment or meals.

There are 4 exceptions to the rule that documentation must be provided:

  • Due to the difficulty in obtaining a transportation receipt, such as a taxi, subway, or bus, the IRS is more lenient when requesting a receipt. However, an employee must keep track of the expenses.

  • If the employer reimburses meals or accommodation using IRS per diem rates, no receipt will be required. Note that a company can reimburse an employee for accommodation at the General Service Administration per diem rates. Still, the employee cannot use per diem rates to deduct unreimbursed accommodation.

  • Individual expenses of less than $ 75 for expenses other than accommodation do not require a receipt.

  • Obviously, there is no mileage receipt when driving a vehicle. To justify the reimbursement, the employee must keep a contemporary file indicating the destination, the purpose, the date of the trip, the people visited, and the number of miles traveled. 

Refunds cannot exceed the IRS business travel rate. Parking and taxes are additional deductions as they are not included in the standard mileage rate.

 

What is a "reasonable period of time"? 

The IRS says this is a situation of facts and circumstances. However, it has guidelines that spell out what constitutes a reasonable period.

If the employee has gotten an advance, it must have been delivered within 30 days of the date of travel. The expense must be justified within 60 days of payment.


Excess Reimbursement

Any excess reimbursement on refund must be returned within 120 days of receipt of a statement from the employer indicating all overdue advances.

These are the IRS guidelines, and a business is free to implement more restrictive rules. For example, the business can ask for evidence for expenses over $ 25, instead of the IRS limit of $ 75.

Additionally, the company may pay mileage for less than the standard IRS fare. Reimbursements under an accountable plan perspective are not taxable income for employees and are not declared on Form 1040. Employees may no longer be able to deduct unreimbursed expenses.


Non-accountable plans

The alternative to an unaccountable plan is a nonaccountable plan or an allowance. By definition, a non-accountable plan is a plan that does not meet the requirements of an accountable plan.

These plans generally require the employer to provide the employee with a set amount or a travel allowance. The employee is not accountable to the employer for the expenses of these funds.

The amount of the benefit is taxable income and must be included on the employee's W-2 Form. 

As mentioned above, the TCJA has dramatically altered the effect of out-of-pocket costs on an employee's return, as they are no more deductible as an itemized deduction.

This increases the importance of reviewing repayment plans and ensuring employees know how these changes may affect them.


Ordinary and necessary

Whether the employer reimburses an expense or reimburses the employee, the same IRS guidelines apply. An expense must be normal and necessary according to IRS rules.

The terms "ordinary" and "necessary" have specific meanings for tax purposes, and the usual use of these words does not apply here.

Normal expenses are commonly used and accepted by general industry standards, that is, expenses with things that are normally required to run a business. An expense is necessary if it is useful and appropriate for the operation of the business.

What is ordinary and necessary also depends on the individual situation. It may be normal and necessary to discuss the business with a client at an expensive restaurant and offer limousine service when negotiating a multi-million dollar contract. Instead, doing the same for a customer who buys $200 per year would not be considered ordinary or necessary.

An expense must be ordinary and necessary to be deductible or refundable. The Internal Revenue Services also has the right to apply a "lavish" standard to business expenses and reject any excessive or extravagant expenses. This test normally only applies in extreme circumstances.


Final Word

Discuss reimbursement terms with your accountant or other tax advisors to make sure you're handling things well. While the savings for successfully executing a plan can be substantial, the cost of mistakes can be even greater.


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Fred Lake
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