Accountable Plans — Not Just for Travel Expenses
Companies can utilize "accountable plans" to reimburse employees for business-related expenses like travel, entertainment, and even tools, with the benefit of keeping these reimbursements tax-free for employees and avoiding employment taxes. To qualify, the expenses must be business-related, properly documented, and any excess reimbursements returned within a reasonable timeframe, typically 60 to 120 days.
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Blog content provided by Barbara Weltman, Publisher of Big Ideas for Small Business ®
Companies can use “accountable plans” to reimburse employee travel and entertainment expenses. By following IRS rules for accountable plans, employees are not taxed on the reimbursements (they don’t even have to be reported on employees’ W-2s), and companies save on employment taxes that would have been owed if the reimbursements had been taxable. But these rules can be used to cover other types of expenses.
The IRS has approved the use of accountable plans for reimbursements of employees’ tools. Key points for a reimbursement arrangement to be treated as an accountable plan:
- The expense must have a business connection (the expense must be incurred by an employee while employed by your company.
- The employee must adequately account to the company for the expense within a reasonable time (usually 60 days after the expenses are paid).
- The employee must return any excess reimbursement or allowance within a reasonable time (usually 120 days after incurring the expense).
While there has yet to be any IRS ruling on point, some experts suggest that accountable plans can be used to cover many other types of expenses, such as employee expenses incurred while working from their homes. If your company wants to use accountable plans in creative ways, discuss this matter with your tax advisor.