Discover how an Accountable Plan works
An Accountable Plan is a reimbursement arrangement that meets specific IRS criteria, allowing expenses paid to employees for business purposes to be excluded from their income.
To qualify, the expenses must be business-related, adequately accounted for within a reasonable time, and any excess amount returned. This setup helps businesses manage expenses transparently while providing tax benefits by excluding these payments from employee income.
Required documents
To establish and operate an Accountable Plan, you need:
- A formal written plan that specifies what expenses are reimbursable.
- Receipts or other documentation from employees proving expenses.
- Records of reimbursements and returns of excess amounts.
Benefits of an Accountable Plan for Business Owners
- Tax Efficiency: Reimbursements are tax-free to the employee and deductible for the business, reducing overall tax liability.
- Regulatory Compliance: Ensures compliance with IRS rules, avoiding potential penalties for both employer and employee.
- Enhanced Financial Management: Provides a structured approach to handling business expenses, improving overall financial transparency and control.
Steps to Implement Your Accountable Plan
- Develop a Clear Policy: Draft a policy that clearly defines eligible expenses, procedures for substantiation, and the timeline for returning excess amounts.
- Educate Your Employees: Make sure all employees understand the plan’s rules and procedures to ensure smooth operation.
- Monitor and Audit: Regularly review expense reports and the overall operation of the plan to ensure it complies with IRS regulations and meets business needs.
Important considerations
It’s crucial to ensure that all reimbursements under an Accountable Plan follow IRS guidelines strictly to prevent them from being treated as taxable income. The plan must be meticulously documented and consistently enforced to be effective. Regular audits and reviews of the plan can help maintain compliance and effectiveness.
For more detailed information, please refer to the IRS Publication 535 and the IRS Form 2106 Instructions.