Having a well-defined accountability plan for reimbursable business expenses is crucial. Without it, the IRS might consider all reimbursements to employees as taxable income, leading to significant financial consequences.
What is an Accountability Plan?
An accountability plan is a policy that businesses use to reimburse employees for work-related expenses. Under IRS rules, if certain conditions are met, these reimbursements are not considered taxable income for employees. This helps ensure that employees are fairly compensated for out-of-pocket expenses while allowing businesses to deduct these expenses.
Before the Tax Cuts and Jobs Act (TCJA), employees had a workaround. They could claim expenses on Form 2016, which transferred to Schedule A. This way, employees received the taxable income but could wash it out under the deduction on Form 2016. It wasn’t ideal but manageable.
Post-TCJA, this option disallowed. Now, an accountability plan is essential for reimbursing employees and allowing businesses to deduct these expenses without them being taxable to employees. It’s a win-win.
To qualify as an accountable plan under IRS rules, three requirements must be met:
1. Business Connection: Expenses must be incurred while performing services as an employee.
2. Substantiation: Employees must provide receipts, logs, and other supporting documentation within a reasonable period.
3. Return of Excess: Any excess reimbursements or advances that exceed the substantiated expenses must be returned to the employer within a reasonable timeframe.
- Employees must submit expense reports by the 15th of the following month.
- All reports should be accompanied by receipts and necessary documentation.
2. Approval Process:
- Managers must review and approve expense reports within five business days.
- Approved reports are then forwarded to the accounting department.
3. Reimbursement Timeline:
- Reimbursements are processed bi-weekly.
- Employees will receive reimbursement via direct deposit.
4. Handling Excess Reimbursements:
- Any excess reimbursements must be returned to the employer within 30 days.
- Employees should notify the accounting department immediately if an excess reimbursement occurs.
5. Record Keeping:
- All expense reports and supporting documentation must be retained for a minimum of three years.
- The accounting department is responsible for maintaining these records.
Having a well-defined accountability plan is vital. It ensures that employees are reimbursed properly and businesses can deduct these expenses without tax issues. This protects both the employer and employee from potential financial pitfalls.
Implementing templates and SOPs will streamline the process, ensuring consistency and compliance across the board.
What is an Accountability Plan?
An accountability plan is a policy that businesses use to reimburse employees for work-related expenses. Under IRS rules, if certain conditions are met, these reimbursements are not considered taxable income for employees. This helps ensure that employees are fairly compensated for out-of-pocket expenses while allowing businesses to deduct these expenses.What's the Big Deal?
Before the Tax Cuts and Jobs Act (TCJA), employees had a workaround. They could claim expenses on Form 2016, which transferred to Schedule A. This way, employees received the taxable income but could wash it out under the deduction on Form 2016. It wasn’t ideal but manageable.
Post-TCJA, this option disallowed. Now, an accountability plan is essential for reimbursing employees and allowing businesses to deduct these expenses without them being taxable to employees. It’s a win-win.
Requirements
To qualify as an accountable plan under IRS rules, three requirements must be met:
1. Business Connection: Expenses must be incurred while performing services as an employee.
2. Substantiation: Employees must provide receipts, logs, and other supporting documentation within a reasonable period.
3. Return of Excess: Any excess reimbursements or advances that exceed the substantiated expenses must be returned to the employer within a reasonable timeframe.
Types of Expenses That Qualify
- Home Office: Expenses related to maintaining a home office.
- Travel and Meals: Costs incurred during business travel and meals.
- Auto Expenses: Costs related to the use of a personal vehicle for business purposes.
- Supplies and Tools: Items necessary for completing work tasks.
- Phone and Internet: Costs associated with business communication.
- Dues, Subscriptions, and Licensing: Professional fees and subscriptions necessary for the job.
Examples of Templates and SOPs
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Expense Report Template
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Standard Operating Procedures (SOPs) for Reimbursable Expenses
- Employees must submit expense reports by the 15th of the following month.
- All reports should be accompanied by receipts and necessary documentation.
2. Approval Process:
- Managers must review and approve expense reports within five business days.
- Approved reports are then forwarded to the accounting department.
3. Reimbursement Timeline:
- Reimbursements are processed bi-weekly.
- Employees will receive reimbursement via direct deposit.
4. Handling Excess Reimbursements:
- Any excess reimbursements must be returned to the employer within 30 days.
- Employees should notify the accounting department immediately if an excess reimbursement occurs.
5. Record Keeping:
- All expense reports and supporting documentation must be retained for a minimum of three years.
- The accounting department is responsible for maintaining these records.
Conclusion
Having a well-defined accountability plan is vital. It ensures that employees are reimbursed properly and businesses can deduct these expenses without tax issues. This protects both the employer and employee from potential financial pitfalls.
Implementing templates and SOPs will streamline the process, ensuring consistency and compliance across the board.
Setting Up Accountable Plans
With $500, we can help you set up accountable plans for your business. Our service includes:
- Developing customized expense report templates.
- Creating detailed SOPs for expense management.
- Ensuring compliance with IRS requirements.
- Training your team on how to use and maintain these plans.
