Why You Should Implement an Accountable Plan in Your Business
As a business owner, maximizing tax benefits while keeping your finances organized is crucial. One of the most effective ways to do this is by implementing an Accountable Plan. This IRS-approved system helps you reimburse employees for business expenses without creating additional tax liabilities. In this blog post, we’ll explain what an Accountable Plan is, how it works, and why it’s a smart choice for your business..
What is an Accountable Plan?
An Accountable Plan is a reimbursement system that allows businesses to reimburse employees for out-of-pocket business expenses without triggering extra tax liabilities. This applies to both regular employees and owner-employees. The key benefit? These reimbursements are not subject to payroll taxes or income tax if they meet IRS guidelines.
For instance, if you’re a W-2 employee working from home, an Accountable Plan enables you to deduct home office expenses in a way that doesn’t affect your taxes.
How Does an Accountable Plan Work?
Under IRS rules, an Accountable Plan allows businesses to reimburse employees tax-free, provided specific criteria are met:
Business-related expenses: The expenses must be for business purposes.
Proper documentation: Employees must submit receipts or records that verify the expense.
Timely return of excess funds: If employees receive more reimbursement than the actual expense, they must return the excess within 120 days to avoid it being taxable.
Reimbursable expenses under an Accountable Plan can include:
Home office costs
Personal cell phone use for business
Travel expenses
Meals and lodging
Entertainment costs
Transportation for business purposes
By implementing an Accountable Plan, you reduce taxable income for your business and help offset non-deductible employee expenses, which were eliminated by the Tax Cuts and Jobs Act (TCJA) of 2018.
Record-Keeping Requirements
Though businesses are not required to submit records to the IRS, they must maintain detailed documentation in case of an audit. Proper record-keeping ensures that you comply with tax laws and safeguards against potential penalties.
To stay compliant with an Accountable Plan, you need to:
Keep receipts for all reimbursed expenses
Document business mileage accurately
Store all records for at least 3 years (or as required by IRS rules)
Accountable Plan vs. Non-Accountable Plan
Without an Accountable Plan, any reimbursements, like those for uniform cleaning or travel expenses, are considered taxable income for employees. The Tax Cuts and Jobs Act eliminated the ability for employees to deduct unreimbursed business expenses, but this provision is set to expire on December 31, 2025. Implementing an Accountable Plan can help you avoid these tax consequences while maximizing your tax benefits.
How to Set Up an Accountable Plan
Setting up an Accountable Plan is straightforward. You can create a formal agreement between the employer and employees using online templates available for businesses. Both the employee and a company representative must sign the plan for it to be valid.
Steps to setting up an Accountable Plan:
Draft a formal policy that outlines reimbursable expenses.
Have employees acknowledge and sign the plan.
Keep track of all receipts, mileage, and business-related expenses using accounting tools.
Documentation and Tools
To stay compliant with IRS rules, businesses need an efficient system to track receipts and mileage. The following tools can help streamline your documentation process:
MileIQ: Perfect for tracking business mileage.
Receipt Bank, Expensify, and Shoeboxed: Great for managing and digitizing receipts.
Ramp: A banking solution that allows easy expense tracking with minimal fees.
By using these tools, you can ensure accurate record-keeping, reduce administrative time, and stay prepared in case of an IRS audit.
Why You Should Implement an Accountable Plan
An Accountable Plan is a smart financial move for any business. It helps:
Reduce taxable income: Reimbursements are not considered taxable income, benefiting both the employer and employee.
Ensure tax compliance: Proper record-keeping and documentation help you stay compliant with IRS guidelines.
Offset non-deductible expenses: Employees can reclaim some expenses that were previously non-deductible under the TCJA.
Conclusion
Implementing an Accountable Plan is one of the best ways to ensure your business operates tax-efficiently while reimbursing employees for necessary business expenses. With clear guidelines and the right documentation, your business can save money and reduce its tax liability—without the headache of dealing with complicated tax rules.
For more information on how to set up an Accountable Plan for your business, or to get started today, reach out to a tax professional or contact us for personalized guidance.
