In the ever-evolving landscape of tax laws and regulations, one often-overlooked yet game-changing concept is the strategic implementation of Accountable Plans. These plans, when executed properly, can deliver substantial tax advantages for both employers and employees.
Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, employees could potentially deduct unreimbursed business expenses on their personal income tax returns. However, the TCJA suspended this deduction for tax years 2018 through 2025, affecting expenses like local business transportation and away-from-home travel.
Enter the Accountable Plan – a strategic solution designed to navigate the TCJA deduction restrictions. Accountable plans, compliant with IRS criteria, enable employers to reimburse employees for business-related expenses without triggering taxable income. This translates to a win-win scenario for both parties.
Benefits for Employers:
- Payroll Tax Savings: Reimbursements under an Accountable Plan are not subject to payroll taxes, resulting in savings on FICA (Social Security and Medicare) taxes.
- Tax Deductibility: These reimbursements are treated as deductible business expenses, contributing to a reduction in the company’s taxable income.
Benefits for Employees:
- Tax-Free Reimbursements: Reimbursements under an Accountable Plan are not considered taxable income for employees. This translates to significant tax savings, especially for those incurring frequent business-related expenses.
To reap these benefits, the plan must adhere to three key IRS criteria:
- Business Connection: Expenses must be incurred solely while performing services as an employee.
- Substantiation: Employees must provide detailed documentation, including the amount, date, place, and purpose of expenses, within a reasonable timeframe. Receipts are required for expenses exceeding $75.
- Returning Excess Amounts: Any excess allowance must be returned to the employer within a reasonable timeframe.
Accountable Plans foster a mutually beneficial arrangement for both employers and employees, enabling reimbursement without increasing tax liability. However, establishing and maintaining such a plan demands a thorough understanding of IRS regulations to avoid potential tax penalties.
Here’s a simplified example tailored for [Your Company Name]:
[Your Company Name] Accountable Plan
- Purpose: To govern the reimbursement of business expenses in compliance with applicable IRS regulations.
- Business Connection: Reimbursements are exclusively for expenses directly related to [Your Company Name]’s business, incurred during employee duties.
- Substantiation: Detailed records, including the amount, date, place, and purpose of expenses, must be submitted. Receipts are required for expenses exceeding $75.
- Returning Excess Reimbursements: Any excess reimbursement must be returned to the company within 60 days of payment or incurrence.
- Noncompliance: Noncompliance may result in the inclusion of the reimbursement in the employee’s income.
- Amendments and Termination: [Your Company Name] reserves the right to modify or terminate the Accountable Plan at any time, with or without prior notice. Any such changes or termination will be effective upon written notification to employees.
For a comprehensive plan tailored to your specific business needs, additional considerations should be addressed, including:
- Effective Date: Clearly define the plan’s effective date to establish its applicability.
- Types of Reimbursable Expenses: Specify the types of business-related expenses that are eligible for reimbursement under the plan.
- Supervisory Approval: Establish procedures for employee expense reimbursements, including supervisory approval requirements.
- Cost and Periodic Limits: Consider implementing cost limits or periodic limits on reimbursements to ensure reasonable and controlled expenses.
- Submission Timelines: Define clear timelines for submitting expense reports and supporting documentation to ensure timely processing and compliance.
- Required Documentation: Specify the specific documentation required for substantiation of expenses, such as receipts, invoices, or travel itineraries.
For further inquiries or a customized consultation, please contact our office.
Feel free to adapt and customize this as needed for your company’s style and specific details.