Accountable Plans offer a strategic advantage for professional tax preparers assisting businesses and their employees. These plans, when properly implemented, can navigate and mitigate the constraints placed by the Tax Cuts and Jobs Act (TCJA) of 2017, which suspended the ability for employees to deduct unreimbursed business expenses through 2025.
Understanding Accountable Plans
Accountable Plans provide a mechanism for employers to reimburse business-related expenses without having these amounts categorized as taxable income for employees. The benefits are twofold:
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For Employers:
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Tax Savings: Reimbursements under these plans avoid payroll taxes, leading to savings in FICA contributions.
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Deductibility: Reimbursed amounts remain deductible as business expenses, aiding in the reduction of taxable income.
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For Employees:
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Non-Taxable Income: Reimbursements don’t have to be reported as taxable income, effectively providing significant tax savings.
- FICA Exemption: There is no FICA withholding on these reimbursements, offering additional savings.
Composing an Effective Accountable Plan
To leverage these tax benefits, an Accountable Plan must satisfy certain IRS guidelines found in Reg 1.62-2:
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Business Connection: Expenses must have a direct relation to the services provided by the employee.
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Substantiation: Employees must provide adequate documentation, including
receipts for any expenses over $75, indicating amount, date, place, and purpose.
- Returning Excess: Overpayments must be refunded to the employer within a reasonable timeframe, typically specified as 60 days.
Example Accountable Plan Template
Here is a template that businesses can use to establish their Accountable Plan, aligning with IRS regulations:
[Company Name] Accountable Plan
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Purpose: This accountable plan is established to govern the reimbursement of business expenses incurred by employees on behalf of [Company Name]. The plan is intended to comply with all applicable IRS regulations.
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Business Connection: Reimbursements are only made for expenses that are directly related to the business of [Company Name]. Employees must incur these expenses while performing services as an employee.
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Substantiation: Employees must provide [Company Name] with detailed records of the expenses. This includes the amount, date, place, and business purpose of each expense. Employees must also provide receipts for any expenses over $75.
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Returning Excess Reimbursements: If an employee receives an advance or an
allowance for business expenses, they must return any amount in excess of the actual expenses within a reasonable period. [Company Name] defines a reasonable period as 60 days after the expense was paid or incurred.
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Noncompliance: If an employee does not comply with the rules of this accountable plan, [Company Name] may include the amount of the reimbursement or allowance in the employee's income.
- Amendments and Termination: [Company Name] reserves the right to amend or terminate this accountable plan at any time.
Additional Details for Consideration
For comprehensive compliance and optimized benefit, businesses should consider including additional specifics in their plans:
- Effective Date
- Reimbursable Expense Types
- Supervisory Approval Requirements
- Expense Cost Limits
- Submission Time Limits and Procedures
- Preferred Suppliers (if applicable)
Conveying these nuances of Accountable Plans to clients can maximize their tax efficiency and ensure adherence to IRS standards. It is crucial to maintain detailed records and clearly communicate expectations to all parties involved to prevent possible tax penalties.