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Every deductible business expense reduces a business's taxable income. When an employee incurs an expense while providing services for the business, those expenses are deductible business expenses IF the employer reimburses his employee for the expenses.
Why do businesses need an accountable expense plan?
However, some businesses don't benefit from those deductions because they fail to have what the IRS refers to as an Accountable Expense Reimbursement Plan.
Without an accountable plan, expense reimbursements to an employee become taxable income to the employee. This costs both the employer and the employee money. The employee has to pay income taxes on the reimbursements. The employer may still have a tax deduction in the form of wages paid, but the employer incurs the additional cost of paying Social Security, Medicare, and FUTA taxes on those wages.
Put simply, having an accountable plan will save both the employer and the employee money.
On the other hand, some employers have suffered during an IRS audit because they failed to have a written accountable plan, either as a separate document or as part of an employee manual, thus resulting in their employees failing to properly document business expenses. So what should a written plan include? The following is a brief outline of what an accountable expense reimbursement plan may contain.
Brief introduction to define an accountable plan and why employees must conform to its provisions.
Review of Legal Requirements
- Explanation of IRS legal requirements and definitions.
Employee Record Keeping Requirements
- Employee business expense logs
- Mileage logs
- How to prove expenses
Company Policies Regarding Travel ExpensesHow to Submit Business Expenses
- Business use of personal vehicle (using standard federal rate, FAVR, or cost)
- Travel expenses (at cost or per diem)
- Meals and entertainment
- Policies Regarding Employer Review and Timing of Reimbursements
- Special Situations
- Use of company-owned vehicles
- Use of company credit cards
If you have any questions regarding accountable plans, or need help preparing a plan for your business, Justworks includes access to Justworks Concierge, an HR service that can hep you with these tricky expense questions.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.