Does your business have a proper “accountable plan” set up? If not, you might be limiting the tax advantage of properly reimbursing costs to employees, or to the owners. Even worse, under an IRS audit these reimbursed costs could be disallowed or recharacterized as wages, which would then be subject to employee and employer taxes.
For a lot of small businesses the only employee is the owner, so not reimbursing costs properly means more money to the IRS and less money to the owner.
An “accountable plan” will help. It is nothing more than a formal plan set up by a business to govern how to reimburse employee (owner) business expenses that have been incurred. Reimbursements made to an employee (owner) under an “accountable plan” are not included in the employee or owner’s income and the business takes the deduction.
Reimbursements made to an employee (owner) under a “non-accountable plan” are included in the employee’s (owner’s) wages. The business can still take the deduction but now has to treat these as wages and pay employee and employer taxes on these amounts.
Under a “non-accountable plan,” the employee (owner) can still deduct the unreimbursed costs but these would be subject to the 2 percent-of-AGI limitation on Schedule A.
Here are the main components of setting up a proper “accountable plan”:
- Business connection: The reimbursement must be for business expenses. Examples include but are not limited to: mileage, travel costs, cell phone, office supplies.
- Substantiation: The employee or owner must substantiate the expenses with proper documentation (such as receipts) within a reasonable period time. To be safe, a “reasonable period of time” would mean that the employee or owner submit an expense form with documentation within 30 to 60 days of the time the cost was incurred.
- Return of excess reimbursement: When businesses pay employee or owners an advance reimbursement for business expenses, the employee or owner needs to return any excess of the reimbursement in a reasonable period of time (30 to 60 days).
Setting up an “accountable plan” is not rocket science but it is a process that must be followed if you want it to be effective. You may want to talk to a CPA to help you set up an “accountable plan” to make sure it is done timely and correctly.
By Ryan Correia