8 Tips for Running a Valid Accountable Plan

Posted By Saaib Uppal, Staff Accountant

Employee Expense Reimbursement Plans - Delaware Nonprofit CPAIf you are managing a nonprofit company that carries an accountable plan for employee business expense reimbursements, you should ensure that you are in compliance with IRS requirements.    Not being so will leave you at risk of having to add reimbursed expenses as earnings on the employee’s W-2 form.  Below is a quick summary of 8 tips to follow that will keep you safe from the IRS.

1) Make sure it’s truly a plan – The IRS doesn’t want to see any freelancing or ad hoc reimbursements.  All reimbursed expenses must be business related and be “reasonable.”

2) Put it in writing – This step is not required but it is more professional in the IRS’s eyes if you are ever questioned about your plan.

3) Reimburse correctly – Keep reimbursement amounts separate from other amounts, such as wages.  Also, keep track of IRS reimbursement amounts such as the mileage rate on vehicles.

4) Make sure the expense is reasonable – Any amount over what the IRS would consider reasonable will be considered as taxable income in their eyes.  You will have to decide what is reasonable.  Remember, however, that you can’t reimburse employees for more than what he or she paid for the 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:

  • Ordinary (reasonable) and necessary
  • Incurred while away from the general area of the employee’s tax home for a substantial period, and
  • Incurred in the pursuit of business

6) Account adequately for the expenses – The IRS requires that these records be kept for any reimbursements that went towards business expenses:

  • 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.

7) Keep proper documentation – Document! Document! Document!  It is better to be safe than sorry when dealing with the IRS.  All lodging expenses must have a receipt (unless you use a per diem plan).  Any other expenses that amount to more than $75 must also be documented with a receipt.  The standard per day amount that taxpayers may use as an optional deduction for meal expenses that qualify has been set by the IRS.  These amounts can be found in IRS Publication 1542, Per Diem Rates.

8) Keep track of mileage – The best way for an employee to protect his or her mileage deduction is to keep track of a vehicle’s business use in writing.

These 8 tips may seem simple, but if not followed could lead to negative consequences.  As mentioned above, results could include your employees having to pay taxes on their reimbursements.  Keeping track of your compliance with the above tips not only keeps you in the good graces of the IRS, but also helps your organization maintain a structure for your expense reimbursements.

Photo By Leo Reynolds (License)

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