Solomon & Hoover CPAs, PLLC Blog - Financial Guidance to Help Your Business Succeed

Solomon & Hoover CPAs, PLLC Blog

Financial Guidance to Help Your Business Succeed

Is there an accountable plan in your company’s future?



The end of the year is a good time to consider making changes to your business. For example, could you be operating more tax-efficiently? And are there better ways to attract and keep good employees?

A potential answer to both of these questions is the accountable plan. Designed to handle business expense reimbursements for tax purposes, accountable plans offer certain advantages to both employers and employees over the per diem method.

A glance at per diem

Most companies taking the per diem approach to expense reimbursements use IRS tables for lodging, meals and incidental expenses. Businesses that don’t use IRS tables typically apply a simplified high-low method within the continental United States to reimburse employees up to $259 a day for high-cost localities and $172 for other localities.

Although the per diem method is relatively simple and requires less record keeping, you must be extremely careful to pay employees no more than the appropriate per diem amount. The IRS imposes heavy penalties on companies that routinely fail to do so. Plus, per diem accounting can easily drive up employees’ tax bills.

Accountable plan advantage

An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. The primary advantage is that your business can deduct expenses (subject to a 50% limit for meals and entertainment) and employees can usually exclude 100% of advances or reimbursements from their income. Employees whose jobs involve frequent travel may realize significant tax savings.

To qualify as “accountable” under IRS rules, your plan must meet the following criteria:

  • It must pay expenses that would otherwise be deductible by the employee.
  • Payments must be for “ordinary and necessary” business expenses such as airfare and lodging charges.
  • Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
  • Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.

If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income and employment taxes — though potentially deductible by the employee.

Consider the move

The main disadvantages of an accountable plan are that it can take time to establish and requires meticulous record keeping. But the advantages often outweigh any initial inconvenience.

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