Accountable Plan Essentials: A Guide for Business Owners
As a small business owner, dealing with complex tax regulations and compliance can be overwhelming. One important aspect that often gets overlooked is the implementation of an Accountable Plan. This powerful tool can streamline expense reimbursements and potentially reduce your tax burden. This comprehensive article will delve into the ins and outs of accountability plans, their significance for small businesses, and how to implement them effectively, including how to ensure that reimbursements are not subject to payroll taxes and are tax-deductible for income taxes.
The Paradigm Shift: Navigating the Post-TCJA Terrain
Before the Tax Cuts and Jobs Act (TCJA), employees could deduct work-related expenses not reimbursed by their employer, including entertainment expenses, if these expenses exceeded 2% of their adjusted gross income. However, the TCJA changed this by suspending these deductions until 2025 and redefining the deductibility of business expenses, including entertainment expenses, on their personal tax return. This means that entertainment expenses are no longer deductible as such under the TCJA. Given the changes, it is important for business owners to review their existing accountable plans and make necessary adjustments to comply with the new regulations.
To mitigate the impact on employees, implementing an accountable expense reimbursement plan is crucial. This allows your company to deduct reimbursements (with some restrictions on meal expenses) while keeping them tax-free for employees for tax purposes. Without such a plan, reimbursements would be taxed as additional wages, subjecting employees to income and FICA taxes. Moreover, the company would need to pay an allowance for these reimbursements, adding to the financial burden of legitimate business expenses.
Understanding the Accountability Plan: A Game-Changer
An accountability plan, in the context of an S-Corp, is a strategic document that outlines specific goals, assigns responsibilities to individual team members or departments, and establishes metrics for measuring progress. It acts as a roadmap, providing a clear path forward for the organization while ensuring that all members are aligned with the company’s objectives.
The Accountable Plan is a crucial tax-compliant structure enabling employees and business owners to seek reimbursement for valid business expenses paid for with personal funds. Its significance has increased due to the elimination of the option to deduct unreimbursed work expenses under the Tax Cuts and Jobs Act of 2017.
Through an Accountable Plan, businesses guarantee that reimbursements for legitimate expenses don’t count as taxable income for employees or owners. This streamlines tax filings and benefits both the business and its stakeholders by lowering the overall tax burden.
The Three Types of Expenses
When discussing Accountable Plans, it’s essential to understand the three general categories of expenses:
100% Business Expenses
It’s best to pay for all business-related expenses, such as office supplies, advertising, or business meals, directly from the business’s accounts. Using personal credit cards for these expenses can create problems with keeping track of spending, mixing personal and business funds (which the IRS doesn’t like), and could cause legal issues. It is important to keep a detailed account book or log to substantiate these expenses and differentiate them from personal expenses.
To keep personal and business finances separate, think about using business credit cards or bank accounts for all business expenses.
100% Personal Expenses
Personal expenses like gym memberships, personal grooming, or entertainment subscriptions should be covered by the individual, not the business. It’s common to use a business credit card for personal expenses accidentally, but it’s important to keep business and personal finances separate.
If you mistakenly use a business account for personal expenses, quickly transfer the money back to your personal account and pay from there.
Mixed-Use Expenses
Mixed-use expenses, such as home office costs, cell phone bills, internet expenses, and vehicle mileage, should be paid personally and then reimbursed by the business based on the percentage of business use. This approach aligns with how employees at large corporations are typically reimbursed for business-related expenses incurred through personal assets.
Only expenses paid personally for business purposes should be listed on the Reimbursement form and Accountable Plan Worksheet.
The Cornerstone: The Big Four
Among the diverse array of mixed-use expenses, four categories stand out as the most prevalent and consequential:
Home Office Expenses
If you have a home office, you might get reimbursed based on the space it takes up in your home. For instance, if your home office occupies 144 square feet in a 2,500-square-foot home, your office represents about 5.8% of your home’s total area. This percentage can also help determine the portion of your mortgage interest, property taxes, utilities, maintenance, and repair costs that can be reimbursed.
Make sure to understand the specific rules for home office deductions, such as the 50-mile rule, depreciation rules, and safe harbor provisions.
Cell Phone Expenses
Many business owners rely heavily on their cell phones for work-related communication but attempting to deduct 100% of cell phone expenses as a business expense can be challenging. For instance, when you use it to send texts about groceries, it’s not all business anymore. Figuring out the exact business percentage is a bit of a guess. Thankfully, we don’t have to track every single call anymore, but we still need to explain why we think, say, 75% of the phone’s use is for business instead of just 40%. The key is to be fair and reasonable – authorities are more likely to accept a number that sounds sensible.
Internet Expenses
Internet expenses are typically handled similarly to cell phone expenses, with reimbursement based on the estimated percentage of business use.
Vehicle Mileage
If you use your personal vehicle for business, you can seek reimbursement either through a mileage rate or a percentage of actual expenses. Many vehicles operate at a cost lower than the standard mileage rate, which can create a tax advantage by deducting more than your actual expenses on your business tax return.
Deciding whether to own your vehicle as a business asset or personal asset can have substantial tax implications. It’s crucial to consult with a professional to determine the best approach for your specific situation.
Benefits of an Accountable Plan
Implementing an accountable plan offers numerous advantages for both employers and employees:
For Employers:
- Tax Deductions: Reimbursements made under an accountable plan are deductible business expenses for the employer, reducing their overall tax liability.
- Compliance: An accountable plan also helps ensure compliance with tax regulations, decreasing the risk of penalties and audits.
- Employee Incentive: By offering tax-free reimbursements, employers can incentivize employees to pursue business goals and promote a culture of accountability.
For Employees:
- Tax-Free Reimbursements: Employees can receive reimbursements for valid business expenses without incurring additional taxes, effectively increasing their take-home pay.
- Simplified Reporting: Employees do not need to report reimbursements received under an accountable plan on their tax returns, reducing the complexity of tax filing.
- Expense Management: An accountable plan provides a structured framework for employees to track and report their business expenses, promoting financial responsibility.
Reasonable Period for Substantiation and Reimbursement
The concept of a “reasonable period” is a critical aspect of an accountable plan, governing the deadlines for expense substantiation and the return of excess reimbursements. While the IRS provides some flexibility in this regard, it also offers two safe harbor methods to ensure compliance:
- Fixed-Date Method: Expenses should be advanced within 30 days of being incurred and confirmed within 60 days, and any surplus reimbursements must be returned within 60 days as well.
- Periodic Statement Method: The employer gives out quarterly statements showing unconfirmed expenses, and employees have 120 days to confirm them or give back any extra reimbursements.
Employers have the option to either use these safe harbor guidelines or consider the specifics of each situation, as long as they keep careful records and stick to reasonable timeframes.
Implementing the Accountable Plan: Step-by-Step
To effectively implement an Accountable Plan in your business, follow these steps:
Adopt an Accountable Plan Policy
Formally adopt an Accountable Plan policy through corporate meeting minutes or a resolution. This document should outline the procedures and guidelines for expense reimbursement. It includes the types of expenses covered, documentation requirements, and the reimbursement process.
Use the Accountable Plan Template
Use a specific Accountable Plan Template or Worksheet to track mixed-use expenses that qualify for reimbursement. Fill out this worksheet regularly, like every quarter, to help with accurate tax planning and keeping good records.
Maintain Proper Documentation
Retain all relevant documentation, including receipts, invoices, credit card statements, and expense logs, to substantiate the expenses listed on the Accountable Plan Worksheet. Proper recordkeeping is crucial in the event of an IRS audit.
Reimburse Expenses Appropriately
It’s best to pay yourself back by writing a check or transferring money from your business account to your personal one for the costs that qualify. This keeps your personal and business money separate, just like how a regular job would reimburse you.
Alternatively, you can reclassify a portion of your owner or shareholder distributions as reimbursements for eligible expenses, such as lodging. For example, suppose you took $20,000 in distributions during a quarter but had $5,000 in eligible reimbursable expenses. In that case, you can reclassify $15,000 as a distribution and $5,000 as a reimbursement, which becomes a deductible business expense.
Maximizing the Benefits of an Accountable Plan
Implementing an Accountable Plan not only simplifies your tax-filing process but also offers several additional benefits:
- Tax Savings: By properly deducting eligible business expenses through the Accountable Plan, you can reduce your overall tax burden.
- Improved Recordkeeping: The Accountable Plan framework encourages meticulous recordkeeping and documentation. That can be invaluable in the event of a legal dispute or IRS audit.
- Separation of Business and Personal Finances: By keeping personal and business finances separate through the Accountable Plan, you reinforce the legal distinction between yourself and your business. This could potentially lower personal liability in legal situations.
- Tax Planning Opportunities: Regular submissions of Accountable Plan reimbursements can facilitate more accurate tax planning throughout the year, reducing the likelihood of surprises during tax preparation.
Elegant Reimbursement Procedures
The preferred method of reimbursement aligns with the IRS’s recommendations and upholds the separation between the business and its owners. In this approach, the business issues a check or initiates a transfer from its checking account to the owner’s personal checking account, mirroring the process employed by external employers.
Alternatively, a less elegant yet acceptable method involves reclassifying owner or shareholder distributions as employee reimbursements. For example, if an owner took out $20,000 in distributions in a quarter but had $5,000 in expenses eligible for reimbursement, the $20,000 distribution would be changed to a $15,000 distribution and a $5,000 reimbursement. The reimbursement portion becomes a deductible business expense and is non-taxable to the owner.
Leveraging Professional Assistance
Implementing an Accountable Plan might seem overwhelming, but seeking professional guidance can make it easier and ensure compliance with regulations. Tax experts and Certified Public Accountants (CPAs) can give valuable advice, create needed documents, and provide consultations for any questions or concerns.
By adopting an Accountable Plan, businesses can streamline their reimbursement procedures and enjoy substantial tax advantages, promoting better financial management transparency and efficiency. Invest in this smart approach today to create a flourishing and tax-optimized business environment.
FAQs
What is an accountable plan and how does it benefit employees?
An accountable plan is a reimbursement plan that meets IRS requirements for business expenses. It benefits employees by allowing them to receive reimbursements for valid business expenses tax-free, promoting transparency and trust between the employer and employee.
How does an accountable plan differ from a non-accountable plan?
An accountable plan requires employees to report expenses for reimbursement with detailed receipts and return any excess funds. In contrast, a non-accountable plan doesn’t necessitate expense tracking or refunding leftover money, but it’s taxable income for employees.
What are the requirements for a plan to qualify as an accountable plan?
For a plan to qualify as an accountable plan, it must require employees to substantiate expenses, return excess reimbursements, and only claim expenses that have a business connection. Additionally, the plan’s guidelines should be in writing and not offer payments as advances or allowances.
Are there any limitations on the types of expenses that can be covered under an accountable plan?
Yes, accountable plans have restrictions on expenses. They must be work-related, adequately documented, and incurred while performing services as an employee. Personal expenses or those that lack proper substantiation cannot be covered under accountable plans to maintain tax compliance and transparency.
How can employees submit expenses under an accountable plan, and what documentation is required?
Under an accountable plan, employees must submit expense reports detailing the nature of expenses, date, amount, and business purpose. Receipts are usually required for expenses exceeding a certain threshold. This documentation is crucial to ensure that expenses are legitimate and comply with IRS regulations.
Conclusion
In conclusion, implementing an Accountable Plan is not just a tax strategy; it’s a fundamental aspect of responsible financial management for business owners. By adopting this framework, you not only streamline expense reimbursements but also unlock significant tax savings while ensuring compliance with IRS regulations.
Simplify your tax filing process, enhance recordkeeping practices, and promote a culture of financial responsibility within your organization. For a comprehensive guide and a customizable plan template, visit Template Roller. Ready to optimize your business’s financial landscape? Take action today with APC 1040’s professional assistance: APC1040.com.
