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What is an Accountable Plan?

Article ID: 174
Last updated: 17 Oct, 2013
Revision: 2
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By Jason Watson ()

This KB article has been superseded. Please see our updated articles or read the updated Accountable Plan KB article.

An Accountable Plan is system of reimbursing employee expenses without having to consider the reimbursements income. A typical response by taxpayers is that he or she doesn’t care since they deduct unreimbursed expenses on their personal tax returns, offsetting the income. This is not a good idea for two reasons.

First, you must be able to itemize your deductions to deduct job-related expenses. Second, the expenses must exceed 2% of your adjusted gross income, and only that portion that exceeds 2% if deducted. Before we go into the plan provisions, let’s examine the reasons why. Here are some numbers-

No Plan A Plan No Plan A Plan
Income 50,000 50,000 50,000 50,000
Company Reimbursements 3,000 3,000 3,000 3,000
Adjusted Gross Income 53,000 50,000 53,000 50,000
Deductions Before Expenses 8,000 8,000 12,000 12,000
Work-Related Expenses 3,000 0 3,000 0
Less 2% of AGI 1,060 0 1,060 0
Total Deduction 9,940 8,000 13,940 12,000
Recognized Deduction 11,600 11,600 13,940 12,000
Taxable Income 41,400 38,400 39,060 38,000
Taxes @ 15% 6,210 5,760 5,859 5,700

So, there are two scenarios- No Plan which is where company reimbursements are considered taxable income and A Plan where the company has an Accountable Plan for expense reimbursements. Each column assumes the same salary of $50,000 and the same work-related expenses of $3,000.

At $8,000 in deductions such as home mortgage, property taxes, charity, etc. your work-related expenses go towards your standard deduction of $11,600 for married, filing joint. By moving to an Accountable Plan under the same conditions, you would be saving $450 in taxes. Not a lot, but it’s better than $0.

And at $12,000 in deductions, the savings is only $159. For arguments sake, if you had $100,000 in income and $10,000 in expenses such as home office, cell phone, internet, mileage and meals, the savings is about $550. So the net-net is that if you already itemize your deductions, then the savings is not as large. However, we still encourage the creation and use of an Accountable Plan. It’s easy. It puts money back into your pocket.

The plan is usually drafted as a company policy that satisfies three basic requirements: a business connection; substantiation; and return of excess amounts-

  • Business Connection: The expense must have a business connection. Typically expenses incurred by an employee while doing his or her job usually have a business connection. It might be a good idea to list some examples of such as home office, cell phone, internet, mileage and meals. Don’t forget per diem allowances and other travel type expenses.
    You could also detail which expenses would be reimbursed. Must answer phone calls outside the office to claim reimbursement. Or only mileage to and from client meetings, delivering product, running errands for supplies, etc. The more comprehensive the allowable business connections, the safer your plan will be.

  • Proper substantiation: The employee must adequately account to the company for expenses within a reasonable time. Adequate accounting means completing expense reports and providing the company with receipts, invoices, and other documentary evidence of the expenses. Using a separate credit card and requesting credit card statements is a great recordkeeping technique. For more information on recordkeeping, substantiation and documentary evidence, read our tax article at-

    www.watsoncpagroup.com/Recordkeeping.pdf

    There are special substantiation rules for meals, entertainment, business gifts and anything considered “listed property.” We can help you these situations if necessary.

  • Return of the Excess Reimbursement: The employee must return to the company any excess reimbursements within a reasonable time. While this is not an issue if you are reimbursed only for what you request, you should still detail this policy in your Accountable Plan. Many companies provide a monthly stipend to cover expenses, and employees are required to return unused portions.

    Here is a timeline according to the IRS-

    1. An advance may be received within 30 days of the time of the expense.

    2. The employee furnishes an adequate account of expenses within 60 days after they were paid or incurred.

    3. The employee returns any excess reimbursement within 120 days after it was paid or incurred.

The Accountable Plan should address the above issues, and it should be drafted as company policy for all employees. While different employee groups and individual employees can have different plans, you should draft this policy while distancing it from any favoritism towards the shareholders.

Meals and entertainment pose an interesting scenario. They are 100% reimbursable to you, but only 50% deductible to the company. If you are an S-Corp LLC then this 50% rule on meals and entertainment will increase your taxable income. Either way, the Accountable Plan is still the best option. Read more about S-Corps at-

www.watsoncpagroup.com/SubS.pdf

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Also read
item Nevada Fallacy of an LLC
item Liability Protection Fallacy of an LLC
item Automobiles and LLCs, S Corps (superseded)
item Paying Rent, Home Office
item Can I call my 1099 ‘other income’ which avoids employment taxes?

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