IRS Accountable Plan for Expense Reimbursement: Rules & Importance

For 2018-2025, the Tax Cuts and Jobs Act (TCJA) disallowed employees or individual taxpayers from taking itemized deductions. Taxpayers can take itemized deductions against their income in order to reduce their taxable income. But this is now disallowed on the updated TCJA. 

Now, if employees incur business expenses, they have to have their employer reimburse these expenses. But the employer can make the reimbursement only if they have an Internal Revenue Service (IRS) accountable plan for expense reimbursement. 

If you run cooperation, then this change can impact you. If you don’t reimburse employees for business expenses they incurred on behalf of your business, the TCJA denies them a deduction for those expenses.

Moreover, if you reimburse business expenses incorrectly, those tax-deductible reimbursements of business expenses become W-2 taxable income.

• Your employees incur business expenses without proper reimbursement. This can add to their personal taxable income and FICA taxes on the reimbursements.
• Your corporation has to pay extra payroll taxes for the proper business expense, which is now considered as a W-2 wage.

That is when accountable plans become necessary. The TCJA Act now disallows employees. 

What is an IRS Accountable Plan for Expense Reimbursement?

An accountable plan follows the IRS regulations for reimbursing workers for business expenses that fall under the plan.

With the IRS accountable plans, the reimbursements are tax-free to recipient employees, and businesses can deduct reimbursements as business expenses. So, the reimbursement payments are not subject to withholding taxes or W-2 reporting.

IRS Accountable Plan Rules & Requirements

Business Connection

1. The plan must provide reimbursements only for a deductible business expense incurred by employees for performing company-related services to establish the business connection of the expense.
2. The company must clearly identify reimbursements when made. For example, if you pay salary and expenses reimbursements on one check, clearly show the reimbursement on the employee’s check stub.

Substantiation

3. The plan requires proper substantiation of reimbursed business-related expenses via an expense log, report, diary, or detailed receipt, within a reasonable period of time after the expenses are incurred.
4. For any lodging expense worth $75 or more, the plan needs a receipt or other document mentioning the following:

a.     amount and business purpose of the expense

b.     place and time of any travel

c.     date and description of business gifts (if received) and the recipient’s relationship to the company.

Travel Expenses

5. For travel expenses, the plan can base reimbursements on the federal per diem rates for lodging, meals, and incidentals. It does not require substantiation of actual amounts spent.
6. Travel expenses for lodging and meals on a business trip are deductible only when they are not extravagant.
7. If an employee gets reimbursement for unsubstantiated or non-deductible travel expenses, the reimbursement is considered fully deductible by the company, reported as wages on Form W-2, and subject to employment taxes and federal income tax.

Entertainment Expenses

8. Do not cover disallowed entertainment expenses with the plan. Instead, your employees should be able to charge those expenses directly to your company account. Entertainment expenses will still be non-deductible, but it will simplify things for both the employee and the employer.

Return of Excess Reimbursement Advances

9. The employees must return any advance exceeding substantiated business expenses. Any unreturned excess reimbursement amount must be treated as additional wages subject to income taxes and federal employment taxes.

Reasonable Period of Time

10. Reimbursement and the return of any excess reimbursement advances must occur within a reasonable period of time, which is dictated by facts and circumstances:

a.     Fixed Date Method: You automatically fulfill the reasonable time requirement in the following conditions stated in accountable plans: (1) Advances will be provided within 30 days before the employee incurs the intended expense. (2) expenses must be substantiated within 60 days after they are paid. (3) advances for unsubstantiated amounts must be returned within 120 days.

b.     Periodic Statement Method: You automatically fulfill the reasonable time requirement if the plan states that the business will: (1) Issue statements to affected employees, ensuring they receive updates (at least quarterly) about outstanding advances that require substantiation. (2) ask for advances that are to be substantiated or returned to the company within 120 days after releasing the statement.

Using a Personal Vehicle for Business?

As per the 2018-2015 Cuts and Jobs Act (TCJA) rules:

• The personal vehicle used for corporate business is a business vehicle.
• Reap your rig.
• To obtain your reimbursements as per your accountable plans, you must submit expense reports as per the accountable plan rules. So, you need a mileage log defining the dollar amount of the corporate reimbursement. The log should include information such as date, starting and ending locations, purpose of the trip, and mileage driven.

Reimbursement Strategies

Under the TCJA’s accountable plans, employees are entitled to reimbursement for legitimate business expenses incurred using personal vehicles. Let us examine some effective reimbursement strategies that align with the TCJA guidelines:

Actual Expense Method: The actual expenses method allows employees to be reimbursed for the actual costs associated with their personal vehicle’s business use. This includes expenses such as fuel, maintenance, repairs, insurance, and depreciation.

To qualify for reimbursement, meticulous record-keeping is essential. Maintain accurate records, including receipts and mileage logs, to substantiate these expenses during tax audits or inquiries.

Standard Mileage Rate: Alternatively, employers may choose to reimburse employees based on the standard mileage rate set by the IRS. The standard mileage rate for 2023 is 58 cents per mile driven for business purposes.

This method simplifies the reimbursement process, as employees are not required to track and document actual expenses. However, it is important to note that if the standard mileage rate is used, it encompasses all vehicle-related costs, including fuel, maintenance, and insurance.

Takeaway

Using an IRS accountable plan for expense reimbursement properly ensures that your business, shareholders, and employees make the most of TCJA benefits for expenses made on behalf of your corporation.