8 tips for running a valid accountable plan

share this article

8 tips for running a valid accountable plan

If you’re like many nonprofits, you probably have an accountable plan for employee business expense reimbursements. If you don’t, you’re at risk for having to add reimbursements to your employees’ wages for income tax and Social Security tax purposes. But do you have the necessary policies and procedures in place to comply with IRS requirements? Here are eight tips for making sure that your plan is beyond reproach.

1. Make sure it’s truly a plan.

Just because employees submit business expense records, it doesn’t mean the employer can reimburse them tax free. But a nonprofit isn’t required to report the reimbursed expenses as earnings on the employee’s W-2 form if it has an accountable plan in place. The IRS requires that all expenses covered in the plan have a business connection and be “reasonable.”

2. Put it in writing.

While an accountable plan isn’t required to be in writing, a formally established plan makes it easier for the nonprofit to prove its validity to the IRS if ever challenged. A written plan also gives the organization a structure for describing its requirements for expense reimbursement.

3. Reimburse correctly.

If an expense qualifies as a business deduction for an employee, it also can qualify as a tax-free reimbursement under an accountable plan. For meals and entertainment, the plan may reimburse expenses at 100% that would be deductible by the employee only at 50%. You must identify the reimbursement or expense payment, and keep these amounts separate from other amounts, such as wages. For 2010, you can reimburse employees up to 50 cents for every mile they put on their vehicles for business purposes.

An accountable plan must reimburse expenses in addition to an employee’s regular compensation. No matter how informal the nonprofit, it can’t substitute tax-free reimbursements for compensation the employees otherwise would have received. For example, assume an employee receives $200 for a day’s work — whether traveling or not — and on a business trip incurs $50 in reimbursable expenses. The employer can’t treat $50 as tax-free reimbursement and report $150 as taxable income.

Even if you give your employees a budget for expenses, if the funds aren’t used for qualified expenses it will invalidate the plan. And an invalid plan means that the employees’ legitimately documented reimbursed business expenses would be taxable.

4. Make sure the expense is reasonable.

This begs the question, what isn’t reasonable? Let’s say an organization reimburses an employee at 70 cents per mile, rather than the allowed 55.5 cents per mile. (Note, this rate went into effect July 1, 2011; the rate was 51 cents per mile from Jan. 31, 2011 through June 30, 2011.) The IRS would consider the extra 14.5 cents excessive and treat it as taxable income subject to wage withholding. Also, an employer can’t reimburse the employee more than what he or she paid for any business expense.

5. Satisfy the criteria for traveling expenses.

The IRS provides three conditions that must be satisfied in an accountable plan. The expense must be 1) ordinary (reasonable) and necessary, 2) incurred while away from the general area of the employee’s tax home for a substantial period, and 3) incurred in the pursuit of business.

6. Account adequately for the expenses.

The IRS requires that the nonprofit keep these records for business expenses that are reimbursed:

  • The amount of the expense and the date,
  • The place of the travel, meal or transportation,
  • The business purpose of the expense, and
  • The business relationship of the people entertained or fed.

IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, provides more details on this topic.

7. Keep proper documentation.

Document all lodging expenses with a receipt, unless your nonprofit uses a per diem plan. Require employees to submit receipts for any other expenses of $75 or more and for all lodging. Credit card statements may be used to provide key elements of your documentation, such as the place and date of the expense, and employees must supplement the statement with documentation of other elements.

The IRS has set standard per day amounts that taxpayers may use as an optional deduction for meal expenses incurred while away from home on business travel. U.S. rates are available in IRS Publication 1542, Per Diem Rates, which also includes the IRS per day amounts for combined meal and lodging expenses. When using a per diem for travel — or mileage for vehicle usage — an employer may adopt a lower amount than the IRS maximum.

8. Keep track of mileage.

An account book, diary, log, trip sheet or similar record may be used to substantiate a vehicle’s business use. This is the best way for the employee to maximize and protect this deduction.

SKR+CO Expert
Blog Administrator