Are you a small business owner who operates their business as a Corporation, S-Corporation, or partnership. As you’re probably aware, the rules for expensing costs paid personally are different than when running as a sole-proprietorship. For these businesses, an accountable reimbursement plan is a tax-efficient way to handle reimbursements for work-related expenses, like travel, meals, home office, vehicle and other expenses incurred personally. Not only does it offer tax benefits, but it allows record-keeping in a tax compliant manner. Here’s a quick guide on when to use an accountable reimbursement plan, its benefits, and how to set one up for your business.
When to Use an Accountable Reimbursement Plan
An accountable reimbursement plan is useful when your business regularly reimburses employees for work-related expenses, such as:
- Travel: Expenses like airfare, lodging, and meals incurred during business trips.
- Supplies or Equipment: Items purchased for business use, such as office supplies or software.
- Mileage: Reimbursement for personal vehicle use for business purposes.
- Client Meals or Entertainment: Expenses incurred when meeting clients.
- Home Office: Business Allocated expenses for an allowable home office.
- Vehicle: Mileage, tolls and parking incurred by the employee on behalf of the business.
If your business requires these types of reimbursements, an accountable plan is a tax-smart solution.
Benefits of an Accountable Reimbursement Plan
1. Tax Savings
Reimbursements under an accountable plan are not subject to income or payroll taxes for employees, and your business avoids payroll taxes on them, leading to significant tax savings. While predominantly used by the business owner, it can be used by any employee with qualified expenses.
2. Simplified Record-Keeping
With clear documentation requirements, this plan helps you maintain organized records, which simplifies tax reporting and minimizes audit risks.
3. Improved Employee Satisfaction
Employees appreciate receiving full reimbursement without paying additional taxes, and it fosters transparency in your business practices.
4. IRS Compliance
Following IRS guidelines for an accountable plan helps avoid penalties and ensures your business is compliant with tax regulations.
How to Set Up an Accountable Reimbursement Plan
1. Draft a Written Policy
Outline the types of expenses eligible for reimbursement (e.g., travel, supplies) and the required documentation, such as receipts and mileage logs.
2. Set Clear Expense Categories
Define reimbursable expenses like business travel, meals, office supplies, and mileage for business trips.
3. Implement Documentation Requirements
Require employees to provide receipts and an explanation of the business purpose for each expense. Set a deadline (typically 60 days) for submitting reimbursement claims.
4. Establish a Process for Excess Payments
If you provide advances for expenses, require employees to return unused funds within a set time frame (usually 120 days).
5. Communicate the Plan
Make sure employees understand the plan, the reimbursement process, and the documentation required.
Conclusion
For small businesses, an accountable reimbursement plan is a simple, tax-efficient way to manage expenses. By following IRS guidelines, you’ll save on taxes, maintain organized records, and ensure compliance. Setting up a plan is easy, and the benefits—both financial and administrative—are well worth the effort.
Consider implementing an accountable reimbursement plan today to keep your business’s finances on track.
If you’re interested in learning more and want professional help with your tax preparation and planning, contact us today for a free, no-obligation consultation at (972) 821-1991 or go to my calendar at https://jablonskyandassociates.com/contact/
