...a CPA's random thoughts...
Accountable Reimbursement Plans
In the course of business, you will inevitably find a time when you need to reimburse an employee for business-related expenses. Some choose to do this through an allowance, which has tax ramifications. What is the proper way to reimburse employees? By creating and adhering to an Accountable Reimbursement Plan.
Under an accountable reimbursement plan, both the employer and employee receive tax benefit, as follows:
- The employer is allowed a deduction fort he expense(s) that the employee(s) submit for reimbursement
- The rules treat the reimbursed expense(s) as tax-free to the employee(s)
Under an accountable plan, reimbursements are not considered wages to the employee(s). In the absence of an accountable plan, they are subject to employment taxes (FICA) and income taxes. The result? An unnecessary drain of cash to the employer AND employee, and paying the government taxes that can simply be avoided by implementing an accountable reimbursement plan.
So what is an accountable reimbursement plan? Simple, it is a list of guidelines that you create as the employer that explains how you will reimburse employee business-related expenses, and the type of expenses that qualify for reimbursement. Examples include mileage, cell phone, meals with clients, among a multitude of other legitimate expenses in connection with a business purpose.
While the accountable plan does not have to be in writing, it is highly advisable to have a written accountable reimbursement plan. Doing so makes it very clear what the company will reimburse, and serves as evidence in the event of an IRS audit. Fortunately, the IRS does give a lot of flexibility in arranging the plan, and sets out four major requirements:
- BUSINESS CONNECTION. The expense must be deductible to the company as an expenses that arises in the course of business;
- DOCUMENTATION. The employee(s) must submit appropriate documentation to prove the nature and amount of the expense, and how it relates to the business;
- SUBSTANTIATION. Employees must prove to the employer that the expense meets the documentation requirements of the tax law (mileage logs for vehicles; who, where, and why for meals; etc.);
- NO EXCESS PAYMENT! If your plan allows for expense advances, the employee must return any excess advances within a reasonable period of time or the excess must be deemed as taxable wages.
Takeaway: Do not do general allowances. Create a written plan and reimburse in accordance with its terms. The IRS may invalidate your accountable reimbursement plan if you demonstrate a habit of disregarding it.
Sincerely,
Greg Bennett, CPA