7 Things About an Accountable Plan You’ll Kick Yourself for Not Knowing.

Are you making the most of your expense reimbursements with an Accountable plan?  If not it’s time to get cracking so don’t let expense report blunders trigger unnecessary taxes, that punish you and your employees.

I’m talking about a little known IRS document called an Accountable plan that helps you reimburse your employees (and yourself) the right way so you can maximize your deductions and minimize your taxes.

What the Heck is an Accountable Plan Anyway?

No, I’m not talking about a plan where you call me up so that I can keep you accountable because you want to lose 10 lbs before summer.  If that is something you want or need there are plenty of coaches that will be more than happy to help.

What do I mean the right way…..the right way creates tax deductions for the business and non-taxable reimbursements for your employees when they make purchases on behalf of the business.

And it even works if you’re a sole proprietor, partnership, LLC, or a corporation.  Yay!

Sorry, I always get excited when I can save my clients’ money.

Here’s the long version.

An accountable plan is a plan that follows the Internal Revenue Service (IRS) regulations for reimbursing workers for business expenses in which reimbursement is not counted as income. This means that reimbursements are not subject to withholding taxes or W-2 reporting. However, these expenses must be business-related to fall under an accountable plan.

Free Fillable Accountable Expense Policy:  Get our ” Sample Expense Policy and Calculator” that lets you craft an expense policy that saves you and your employees’ money.

Now let’s talk about it in English….

• An accountable plan allows you to reimburse employees for work-related costs (including yourself).
• They are not subject to taxation by your employees (but are 100% deductible for you).
• They must be business-related and reported using an expense report
• If you give your employee an amount (to buy a laptop etc.) and they don’t use all of the money the excess must be returned to the business.
• If the reimbursement is considered non-accountable, then it is considered a taxable event and it would be added to the employee’s taxable wages (including you).

Got it?

If not just keep reading and hopefully, it will become a bit clearer.  

1.      Who Should Use an Accountable Plan?

Anyone who owns a business.  Period.  A couple of exceptions though because every rule should have an exception.

If you’re a single member LLC with no employees all your business expenses are deductible, and you don’t need to bother creating an Accountable Plan.  But as soon as you hire your first employee it’s time to start creating one.  You can download our sample worksheet and sample Accountable Plan here.

2.      Not All Tax Deductions Are Created Equal

Let’s Talk Meals and Entertainment

When the Tax Cuts and Jobs Act (TCJA) was put into effect it really tried to limit the deductibility of some meals and most entertainment expenses.  But there are exceptions to every rule.

Because you’re reimbursing an employee for their work-related expenses you can now deduct 100% of the meal and entertainment as long as it’s properly identified. (Make sure you have an expense policy in place for the proper documentation).

Remote workers and Office Allowance

Since COVID-19 everyone seems to be working from home which means they are incurring expenses.  As an employer, you can give your employees reimbursement for their home offices. 

This can include:

1. Home office
2. Utilities
3. Equipment
4. Computer
5. Cell phone or land line
6. Vehicle
7. Mileage

Which means you can do this in 1 of 2 ways.

You can give them an allowance per month to cover these expenses.  (Let’s say 250.00) for the use of their home. 

Or

You can have them submit their bills and you cover a portion of them based on usage. 

For example, you can have them submit their electricity bill and then cover a portion as it relates to their home office.  Or a portion of their internet bill etc.

3. You Must Keep Good Records

Look one of the downfalls of many good businesses is that they keep lousy records.  Once you have an accountable plan in place it becomes important that you keep your expense reports and associated documentation, and that you properly account for it in whatever your accounting system your using.

A few rules to note when putting it in place

1. The Expenses must have a business connection
2. The expenses must be substantiated within a reasonable time period. ( we try to use 60 days) but it can be 365 days as long as it’s in the accountable plan).
3. Employees must return any money not spent on the employer (also within a reasonable time).

4.  You Can Even Give Your Employees an Allowance to Use Their Own Equipment

If your employees use their cell phone, lap tops or desktops for business use then it might be nice to offer them a yearly allowance to upgrade their equipment.  Just make sure you go by the three rules above to make sure it is documented.  And if any of the equipment is less then the allowance the employee will have to return the excess.

5.   Not All Employees Are Equal Under an Accountable Plan

With retirement and other accounts you have to treat all your employees equal so if you give a match of pay to one employee you have to give it to all of them (there are exceptions to this for business owners).  However, under an accountable plan you can treat differently. 

Let’s use an example: 

As the owner you create an accountable plan and reimburse yourself as an executive for the office allowance.  That does not mean you have to give your sales staff an allowance for their home office. Just make sure you cover everything in your Accountable Plan.  If you need some help you can download the Accountable Plan Reimbursement and Spreadsheet Here.

6.  Beware of Business Credit Cards without an Accountable Plan

I love those mileage perks of having a business credit card but beware if you have a corporate credit card without an Accountable Plan.  Let’s say you have corporate credit card with three employees.  Without an Accountable Plan, the money that you pay to the credit card becomes taxable income to your employees.  What would happen?  You would have to include that amount as a taxable wage on their W2.  Make sure your employees are aware of your expense policy and reinforce it.  They’ll thank you at tax time.

7.  If You Create it Wrong You Could Create a Taxable Wage to Your Employees

If you don’t have an accountable plan or you don’t create it correctly you could end up reimbursing yourself and your employees and causing a tax event.  For example, you have an employee and you reimbursed him $200.00 for mileage.  Without an Accountable Plan that $200.00 is considered a taxable wage which means you need to collect payroll taxes and you would be on the hook for paying the business side of the payroll tax.  

Instead, download our sample Accountable Plan and make sure your employees have an expense policy that reimburses them for work-related expenses that doesn’t cause tax headaches.

Free Fillable Accountable Expense Policy:  Get our ” Sample Expense Policy and Calculator” that lets you craft an expense policy that saves you and your employees’ money.

Putting it All Together

 Accountable Plans come with a lot of perks if you set them up right.  Make sure you document your deductions, so they don’t come and bite you in the ass come tax time.  You don’t have to treat your employees equal so just because you take an allowance for a home office doesn’t mean you have to give it to your employees as well. Beware of business credit cards so you don’t punish yourself or your employees with taxes.  If your not sure which expenses are deductible make sure you read the Big Fat List of Small Business Deductions and include them in your expense plan.

And remember, if you need some help creating an Accountable Plan for your business, we’re here to help you out.  You can either download the Sample Accountable Plan or give us make an appointment with us. 

Cheers!

Andrea