Navigating the world of business expenses and reimbursements can be tricky. You want to ensure your employees are taken care of, but you also need to comply with IRS regulations.
This is where the IRS Accountable Plan comes in. Understanding this is crucial for businesses of all sizes to handle employee expense reimbursements correctly.
This guide will provide you with a 101-level overview to help you get started.
What Is an Accountable Plan?
An accountable plan is a system your business uses to reimburse employees for business expenses. It’s a set of rules that, when followed, allow both you and your employees to benefit from favorable tax treatment.
Accountable Plan vs Non-Accountable Plan
The primary difference lies in how the reimbursements are treated for tax purposes. Accountable plans, when followed correctly, allow reimbursements to be excluded from the employees’ gross income.
In contrast, non-accountable plans treat reimbursements as part of the employee’s wages.
Tax Implications for Each Plan Type
Under an Accountable Plan, employees don't pay income tax on the reimbursements. With a Non-Accountable Plan, the reimbursements are taxable income to the employee.
Reporting Differences for Businesses
Employers also have different reporting responsibilities. For Accountable Plans, reimbursements are not reported as wages on the employee’s W-2. For Non-Accountable Plans, the reimbursement amounts are included in the employee’s wages on their W-2.
Impact on Employee's Tax Obligations
Employees prefer Accountable Plans because they aren’t taxed on the reimbursed amounts. Non-Accountable Plans increase the employee's taxable income, leading to higher tax liabilities.
Examples Illustrating the Differences
- Accountable Plan Example: An employee travels for a business trip, submits an expense report with receipts within a week, and receives reimbursement. The reimbursement is not included in their wages.
- Non-Accountable Plan Example: An employee receives a flat monthly amount for expenses, without needing to provide documentation. This amount is included in their taxable wages.
How Does an Accountable Plan Work?
Let’s break down the process of how an accountable plan functions:
Step-by-Step Process of Reimbursement
- Employee Incurs Expenses: An employee pays for legitimate business expenses.
- Expense Reporting: The employee submits an expense report to the employer, and along with it, supporting documentation.
- Employer Reviews and Approves: The employer verifies the expenses to ensure compliance with the plan.
- Reimbursement: The employee is reimbursed for the approved expenses.
Substantiation Requirements
Substantiation is a critical part of the process. Employees must provide adequate records, such as receipts, invoices, and logs, to support the expenses they are claiming. This documentation should include details like the amount, date, place, and business purpose of the expense.
Returning Excess Reimbursements
If an employee receives an advance or reimbursement that exceeds their actual expenses, the employee is required to return the excess amount to the employer within a reasonable time.
What is a Reasonable Period of Time?
The IRS provides some guidance on what constitutes a "reasonable period." While it depends on the specific circumstances, the following actions are generally considered to occur within a reasonable time:
- Receiving an advance within 30 days of incurring the expense.
- Substantiating expenses within 60 days after they were paid or incurred.
- Returning any excess reimbursement within 120 days after the expense was paid or incurred.
Safe Harbor Rules for Timeliness
These timeframes act as a "safe harbor." If your business follows these guidelines, it's generally considered compliant with the "reasonable period" requirement.
Electronic Reimbursement Arrangements
In today’s digital age, many businesses use electronic systems for expense reimbursement. The IRS recognizes the validity of electronic records and has provided guidance on this.
Using Electronic Receipts
Many companies now use electronic receipts to streamline the reimbursement process. These receipts, provided by credit card companies or other systems, contain crucial information such as the date, amount, merchant, and details of the transaction.
As long as these systems comply with IRS guidelines, they are acceptable for substantiation purposes.
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What Expenses are Included in an Accountable Plan?
A variety of expenses can be included in an Accountable Plan. Here are some common examples:
Eligible Expenses
Generally, these are ordinary and necessary expenses related to the business.
Travel Expenses
This includes costs for transportation, lodging, and other necessary expenses incurred while traveling for business.
- Transportation: Costs of traveling by airplane, train, bus, or car between your home and your business destination.
- Lodging: Costs for lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties.
- Incidentals: Fees and tips given to porters, baggage carriers, hotel staff, and staff on ships.
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Meal Expenses
These are expenses for food and beverages incurred while traveling away from home on business.
- Actual Cost vs. Standard Meal Allowance: Businesses can either reimburse the actual cost of the meal or use a standard meal allowance.
- Per Diem Rates: The IRS allows for per diem rates, which are set amounts for daily meals and incidental expenses, varying by location.
- Rules for Transportation Workers: Transportation workers have a special standard meal allowance.
Entertainment Expenses
While entertainment expenses are generally no longer deductible, there are some exceptions, particularly for food and beverage expenses.
- Separating Costs: If an expense includes entertainment and other services, these costs must be allocated reasonably.
- Exceptions to Non-Deductibility: Certain entertainment expenses may be deductible, such as those treated as compensation or recreational expenses for employees.
Gift Expenses
You can deduct the costs of business gifts, with certain limitations.
Car Expenses
If you use your car for business purposes, you can deduct car expenses.
- Standard Mileage Rate vs. Actual Car Expenses: You can choose between using the standard mileage rate or deducting actual car expenses.
Ineligible Expenses
It's important to be aware that not all expenses can be reimbursed under an Accountable Plan. Personal expenses, for example, are not eligible for reimbursement.
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Requirements for an Accountable Plan
To ensure your plan qualifies as an Accountable Plan, it must meet specific requirements:
Business Connection
The expenses reimbursed must have a clear business connection. The plan cannot reimburse personal expenses.
Substantiation Requirements in Detail
Employees must provide adequate documentation to substantiate their expenses.
- Adequate Accounting: This involves providing a statement of expense, account book, diary, or similar record with supporting documentation.
- Documentary Evidence: This includes receipts, canceled checks, and other documents that prove the expense.
- Electronic Records: If using electronic records, they must meet specific IRS requirements.
- Specific Substantiation Rules for Different Expense Types: The type of documentation required may vary depending on the expense.
Return of Excess Amounts
Employees must return any amount received that is more than the substantiated expenses.
- Definition of "Excess Reimbursement or Allowance": This is any amount paid that's more than the business-related expenses adequately accounted for.
- Travel Advances: If employees receive a travel advance, they must account for it and return any excess.
Consequences of Non-Compliance
If your plan doesn't meet these requirements, it's considered a non-accountable plan, which has significant tax implications. Failing to adhere to the rules can lead to reimbursements being treated as wages, which are subject to income tax and employment taxes.
How to Create an Accountable Plan?
Creating an Accountable Plan involves careful planning, clear documentation, and consistent implementation. It's not just about setting up a reimbursement system; it's about establishing a process that complies with IRS regulations and ensures fair treatment for both the employer and employees.
1. Document the Plan
Put the plan in writing. While a written plan isn't strictly required, it provides a crucial framework to ensure all necessary elements are addressed. This written document should clearly outline the rules and procedures for expense reimbursement.
The policy should clarify key aspects, such as:
- The time period for employees to submit expenses.
- The process for requesting reimbursement, including what documentation is required to substantiate the request.
- The process for returning excess reimbursements or allowances.
- The types of expenses that are reimbursable.
- The maximum allowable amount for certain expenses.
- Preferred suppliers for reduced expenses, if applicable.
2. Communicate the Plan
Ensure all employees, including business owner/employees, are fully aware of the plan and thoroughly understand its requirements.
Provide training and resources to employees so they understand:
- What expenses are eligible for reimbursement?
- How to properly document expenses?
- The process for submitting expense reports.
- The importance of adhering to the plan's guidelines.
- The consequences of non-compliance.
3. Implement Procedures
Set up the necessary processes and systems for expense reporting, review, and reimbursement.
This may involve:
- Establishing a system for employees to submit expense reports and documentation (this could be a manual or digital system).
- Designating who will review and approve expense reports.
- Setting up a process for timely reimbursement of approved expenses.
- Implementing internal controls to ensure compliance and prevent misuse of funds.
Essential Components of an Accountable Plan
A well-structured Accountable Plan should include these essential components:
Clear Guidelines On What Expenses Are Eligible For Reimbursement
- These guidelines should specify the types of expenses that can be reimbursed, ensuring they align with IRS regulations (ordinary and necessary business expenses).
- Examples of reimbursable expenses include travel expenses, mileage, tools and supplies, home office expenses, cellphone and internet costs, training and development, and dues and subscriptions.
Specific Substantiation Requirements
- The plan must outline the documentation employees need to provide to support their expense reports.
- This includes details on what information is required in records (amount, time, place, business purpose) and acceptable forms of documentation (receipts, logs, etc.).
Procedures For Returning Excess Reimbursements
- The plan should detail the process for employees to return any advances or reimbursements that exceed their substantiated expenses.
- It should also specify the timeframe for returning these excess amounts.
Importance of Clear Communication to Employees
Clear and consistent communication is paramount for the successful implementation and operation of an Accountable Plan.
Employees need to understand:
- What is expected of them in terms of expense reporting and documentation?
- How to accurately submit expense reports.
- The importance of complying with the plan's rules.
- The potential consequences of non-compliance, such as having reimbursements treated as taxable wages.
Some Best Practices to Implement an Accountable Plan
To make your Accountable Plan effective and compliant, consider these best practices:
Clear Communication of Policy
As mentioned earlier, ensure your employees are thoroughly trained on the plan and its requirements. This is crucial for successfully implementing your accountable plan.
Use of Technology for Expense Reporting
Using an expense reimbursement software to automate and streamline the reimbursement process.
How does this help?
- Receipt Capture: Many platforms allow employees to easily capture receipts using text messages, mobile, and other everyday apps, reducing the risk of lost or misplaced documentation.
- Expense Categorization: Automated systems can help categorize expenses, ensuring they are classified correctly for accounting and reporting purposes.
- Policy Enforcement: Software can be configured to enforce company expense policies, flagging expenses that are out of compliance.
- Reporting: Automated systems generate reports that provide insights into spending patterns, making it easier to track and manage expenses.
- Accuracy: Automation reduces the risk of manual errors in expense reporting and reimbursement.
Regular Audits of Expense Reports
Periodically review expense reports to ensure compliance and detect any potential issues. It also helps to:
- Identify and correct any errors or inconsistencies.
- Detect any fraudulent activity or misuse of funds.
- Ensure that employees are following the plan's guidelines.
Employee Training
Provide ongoing training to employees on the Accountable Plan, emphasizing proper procedures and documentation.
Enforcement of Policy and Consequences of Violation
Consistently enforce the plan and ensure employees understand the consequences of not following it.
How Fyle Can Help
Fyle offers a range of features that can assist businesses in meeting the requirements of an Accountable Plan.
Streamlined Receipt and Expense Tracking
Fyle streamlines the expense and receipt tracking process for employees by letting them use everyday apps like text message, Slack, Gmail, Outlook, and Teams. This seamless integration with familiar tools makes expense reporting faster and more convenient for employees, reducing the time and effort required to submit and track their business expenses.
Automated Policy Checks
Fyle enhances compliance and reduces errors through its automated policy checks. Fyle's AI technology proactively reviews expenses against your business's pre-configured policies before they are submitted. This automated screening process helps to identify and flag any potential issues or non-compliant expenses early, allowing for corrections before reimbursement.
Direct ACH Reimbursements
Fyle facilitates efficient and secure employee reimbursements. The platform enables direct deposit of reimbursements into employee accounts via ACH (for US only). This direct reimbursement method ensures fast and reliable payment, streamlining the reimbursement process and improving employee satisfaction.
