Use an Accountable Plan To Manage Business Expenses
I generally recommend that all my clients establish an accountable plan, which is simply a plan that adheres to the IRS rules when it comes to reimbursing workers (including owner-employees) for business expenses. Under the accountable plan, those reimbursements are not subject to typical withholding taxes—but there are, of course, rules as to what is allowed to be expensed.
Leveraging an accountable plan along with tax planning can keep your business in the clear with the IRS and help you manage expenses and reimbursements much more easily.
The Benefits of an Accountable Plan
An accountable plan allows you to manage reimbursements without negative tax implications. With proper guidelines and documentation, you and your employees can get reimbursed for business-related expenses without having to claim these payments as part of your taxable income.
Without an accountable plan, all reimbursements could be taxable as these expenses could be considered fringe benefits, racking up big tax bills for your employees. Having an accountable plan in place for you and your employees is a win-win at tax time for everyone.
What Can I Deduct Under an Accountable Plan?
The 2017 Tax Cuts and Jobs Act (TCJA) outlined major changes in business-related tax guidelines for 2018-2025. Along with adjustments to corporate tax rates and business incentives, the TCJA established clear distinctions between which business expenses are deductible and non-deductible.
Deductible expenses must have a clear and legitimate business connection, such as necessary resources to fulfill the duties of one’s job. Non-deductible expenses, like entertaining clients, do not count and are subject to taxation for reimbursements to the employee as they must be treated as wages.
Here are some examples of deductible and non-deductible expenses as defined by the IRS:
Deductible Expenses:
Travel expenses, including meals
Gas or mileage expenses for personal vehicles
Home office, including depreciation, tools, supplies, cellphone, and internet
Training and development
Dues, subscriptions, and professional licenses
Required uniforms
Job search expenses for employees who have been laid off
Non-Deductible Expenses:
Nightclubs
Cocktail lounges
Theaters
Country clubs
Golf and athletic clubs
Sporting events
Hunting and fishing
How Do I Establish an Accountable Plan?
To create your own accountable plan, define what can and cannot be reimbursed without tax responsibility and create a structure for reporting and reimbursing these expenses that everyone can follow and can be easily managed.
Making your accountable plan part of your business structure will eliminate conflicts around reimbursements and IRS issues when it comes time to file.
Here are some helpful guidelines to establish a clear plan for you and your team:
Define which expenses are included in the plan and which are not to avoid any questions or concerns about what can be reimbursed without impacting personal taxes.
Communicate the requirements for submitting expenses to you. Employees must provide you with detailed information, including date, time, place, amount, and business purpose for the expense. Creating templates for documentation and utilizing apps designed to help keep track and document expenses can help significantly.
Choose a method and schedule that works for you. Use a fixed date or periodic schedule with clear deadlines so payments and reporting can be completed in a timely, manageable timeframe.
At Modis Advisors, we’re here to help, too. Our Controller and CFO plans help you with methodical and efficient ways to manage accountable plans and regular business transactions monthly. Reach out to us today to get started!