Creating an Accountable Plan: A Smart Move for Small Business Employee Reimbursements
If you’ve never heard of an accountable plan before, you’re not alone! Many small business owners and employees need to be enlightened about this beneficial policy because it’s not often discussed outside of financial, tax, or HR circles.
Unlike widely known deductions and expense practices, accountable plans are nuanced, IRS-approved reimbursement arrangements that may only come up through interactions with tax professionals or accountants. However, understanding and implementing an accountable plan can be a game-changer for small businesses, offering tax benefits, streamlined expense management, and a way to support employees effectively.
If you or your employees have paid for a business expense out-of-pocket that needs reimbursement, or if you’re a corporation unable to claim home office deductions, an IRS accountable plan could be the answer. Unlike self-employed individuals, corporations and LLCs that elect to be treated as corporations don’t qualify for home office deductions. Instead, they can use an accountable plan to reimburse employees, shareholders, and owners for home office expenses, allowing these costs to be listed as a deduction on the corporate tax return.
What Is an Accountable Plan & What Are the Benefits for Small Businesses?
An accountable plan is an IRS-approved reimbursement arrangement where businesses can pay back employees for legitimate business expenses without these payments being classified as taxable income to the employee. This ensures that employees receive expense reimbursements tax-free, while businesses can deduct these costs as legitimate business expenses.
Benefits of Accountable Plans:
Tax Efficiency: One of the main advantages is tax savings. Employees benefit because reimbursements under an accountable plan aren’t subject to income tax. Employers, on the other hand, can deduct these reimbursements as business expenses, lowering the overall tax burden for the business.
Ease of Administration: With clear documentation requirements, an accountable plan streamlines the process of managing reimbursable expenses. Accountable plans can provide advances or allowances to be substantiated by the employee after the fact. An accountable plan must provide straightforward guidelines for tracking expenses, ensuring both employers and employees understand what qualifies for accountable plan reimbursement.
Alternative to Home Office Deductions: For businesses with remote employees, an accountable plan can simplify expense management. Instead of employees dealing with complex home office deduction rules, employers can reimburse work-related expenses directly. This method helps businesses cover reimbursable expenses efficiently while maintaining IRS compliance.
Accountable Plan Flexibility: Accountable plans don’t have to be available to all employees, allowing employers to target employees or roles based on:
Job role: Tailor reimbursement types based on duties (e.g., travel for sales staff).
Responsibilities: Offer reimbursements specific to job responsibilities.
Geographic location: Consider reimbursements for remote workers or employees in high-cost areas.
IRS Requirements for Accountable Plans
To qualify as an accountable plan, the IRS outlines three primary conditions that must be met:
Business Connection: The expenses must be directly related to the business. This means costs reimbursed should support legitimate business activities, such as travel expenses, equipment, or supplies necessary for the job.
Not all business expenses qualify for reimbursement under an accountable plan. Specifically, costs related to entertainment, recreation, or amusement (such as attending theater performances, joining country or athletic clubs, participating in sporting events, hunting and fishing trips, and visiting nightclubs or cocktail lounges) are excluded from coverage.
Substantiation: Employees need to document their reimbursable expenses adequately. This includes submitting receipts, mileage logs, or other proof of the expense. Proper substantiation helps maintain compliance and ensures that the accountable plan meets IRS standards.
Return of Excess Amounts: If any excess reimbursements are provided, employees must return these amounts to the employer within a reasonable time. (Generally, the IRS considers 60 days to be a “reasonable” amount of time.) If an accountable plan does not meet these requirements, reimbursements may be classified as taxable wages.
By adhering to these rules, businesses can confidently offer expense reimbursements that qualify for tax deductions.
4 Steps to Create an Accountable Plan
Creating an accountable plan for your small business involves a few important steps to ensure it aligns with IRS regulations:
Draft a Written Policy: Develop a formal policy outlining the types of reimbursable expenses, such as travel, meals, home office supplies, and other business-related costs. Clearly state the documentation required for each expense to ensure proper substantiation.
Communicate the Policy to Employees: Make sure employees understand the rules, including what qualifies for reimbursement and the necessity of returning any excess amounts. This helps maintain clarity and keeps the plan efficient.
Set Up an Approval and Documentation Process: Implement a system for employees to submit receipts and other documentation promptly. Establish timelines for when expenses need to be reported and reimbursed to maintain compliance.
Monitor and Review the Plan: Regularly review the accountable plan to ensure it continues to meet IRS requirements and effectively supports the business. Adjust the policy as necessary to accommodate new types of business expenses or updated IRS guidelines.
Accountable Plan for S Corporation Deductions and Reimbursements
S corporations, in particular, benefit from accountable plans as they can reimburse expenses incurred by shareholder-employees without those payments being taxed as income. For example, if a shareholder-employee works from home, an accountable plan can be used to reimburse specific expenses related to their home office without needing to claim a home office deduction directly. This simplifies tax filing and ensures compliance with IRS regulations.
And since accountable plans are not employee benefit plans, they do not have to follow the nondiscrimination rules applicable to employee benefit plans. For example, a business can reimburse an owner for a home office but choose not to do so for its employees. Or an employer can have different arrangements with different employees.
Conclusion
Small business owners should consult with an accountant or HR professional when creating or updating an accountable plan to stay current with IRS regulations. By meeting the three key IRS requirements—business connection, substantiation, and the return of excess amounts—businesses can ensure their accountable plan supports tax efficiency and clear financial management.
For S corporations, this strategy offers particular benefits by facilitating deductions and reimbursements for shareholder-employees, all while avoiding the complexity of home office deductions. Implementing an accountable plan can improve your expense management system, enhance transparency, and ultimately support the growth and stability of your small business.
To learn even more about best practices for foolproof expense reimbursement policies, check out our other article, here.
Here at JLS Accounting, we provide our clients with an Accountable Plan template to easily track reimbursable expenses. If you’d like to learn more (and gain a ‘sneak peek’ at our template), schedule your no-obligation discovery call today.