Accountable Plan: Do you Really Need It? This Will Help You Decide!

Let’s chat.  How about something fun and interesting and so amazing that you……ok….I don’t know how to make an Accountable Plan sound fun.  But, if I can interest you in some tax saving tips and easy setup instruction, stick around.  An Accountable Plan so easy you will flip!

What is an Accountable Plan anyway and why do you even want to know about it?  Well, an Accountable Plan is a fancy term for, basically, an expense reimbursement policy.  Just formalized.  And in such a way that it allows those reimbursements to be non-taxed to the employee and to also be treated appropriately as an expense to the company.  The scary piece of the puzzle is the Plan.  Sounds scary, but really it is a simple concept that if reimbursements to owners and their employees are properly documented and recorded, they are not taxable to the recipient (assuming it is a legitimate business expense).  

The Plan must comply with three standards:

1) The expenses must have a business connection;

2) The expenses must be substantiated within a reasonable period (within 60 days of when the expense was paid or incurred); and

3) The employee, when advanced, must return excess amounts within a reasonable period (think reimbursement paid in advance and overestimated equals returned excess to the employer). 

Let’s talk substantiation.  Generally, the employer must collect documentation/receipt that includes a date, time, location, amount, and business purpose of the expense.  A simple credit card charge slip is not enough.  The receipt must categorize/itemize the expense.  There are a few exceptions.  For instance, businesses may rely upon federal per-diem and milage allowances to report travel and meals rather than the categorized/itemized receipts (with this exception pertaining only to employees and not business owners). 

The IRS does not have any requirements for what is within the written expense reimbursement policy or even that it need be in writing. Though it does require the Plan adoption to be in writing.  Intuit has a great sample Agreement to Adopt An Accountable Plan.  Though the written expense reimbursement policy is not required, best practice is to have it in writing for consistency and organization.

The expense reimbursement policy should clarify:

1) the way in which an employee submits expenses for reimbursement;

2) the time frame in which they have to do so;

3) the process in which to do so; and

4) how long it will take to be reimbursed.

It should be noted that the Accountable Plan is only good for the employees of a company.  Since partners and LLC members are not employees, they are not included in Accountable Plans.  Although, typical reimbursement for business-related expenses would apply.