What is an Accountable Plan?

Simply put, an accountable plan is a reimbursement plan. It’s a written policy that allows a company to reimburse its employees for costs that the employees have and not allow them to get taxed for their reimbursements from their employer.

Accountable plans are beneficial to employees because they don’t have to worry about tax, and the employer can take a deduction for the reimbursement.

Also, if you’re an owner or officer of an S-Corporation, this is the only way you can take a home office deduction and deduct it – is through an accountable plan. More on that later. For now, let’s get into what the IRS says about accountable plans.

The IRS and Accountable Plans

The IRS code specifically says, “amounts paid under an accountable plan are excluded from the employee’s gross income, are not required to be reported on the employee’s Form W-2 and are exempt from withholding and the payment of employment taxes”.

In other words, if your company has set up an accountable plan correctly:

The company can take a deduction for the reimbursements it gives back to its and employees, and
The employees don’t have to pay taxes on the reimbursements they get paid back.

3 IRS Rules Regarding Accountable Plans

Of course, anything regarding the IRS has rules, and accountable plans are no different. Here are the three important rules you must follow to appease the IRS, to set up your accountable plan correctly.

Business Connection
Substantiation
Return of Excess

Business connection – you must show that the reimbursements have some form of business purpose or business connection.

Substantiation – the employee must be able substantiate the items and amounts that they are asking to be reimbursed for. Examples of substantiation include:

Travel Log
Invoices
Receipts
Business purpose of your trip
How you calculated your business use of your home office for your accountable plan reimbursement

Return of Excess – If the company overpays your reimbursement, the employee must return the excess. Here’s an example: Adam receives a $2,000 advance for a business trip to Florida. When Adam’s done with the business trip, he substantiates that his costs were only $1,700. Adam must return the extra $300 back to his employer.

Written Policy – all three of the rules above must be detailed in the company’s written policy on accountable plans. The written policy is normally given to new employees as part of their employee onboarding package when they get hired.

7 Common Accountable Plan Reimbursements

You’re probably wondering, what can be reimbursed. Here are some common accountable plan reimbursements:

Travel costs
Meals
Office Supplies
Business Development costs
Telephone
Home office and home internet
Mileage reimbursements

Are these all the reimbursements? No, but these are the most common ones.

Home Office Accountable Plan

In my previous article I wrote about how to calculate your Home Office deduction. However, to get the home office deduction when you own an S-Corporation, you must have an accountable plan. You can’t use the regular rules of the home office deduction when you own an S-Corporation. So, if you are an officer of an S-Corporation, check with your CPA or tax return preparer to make sure you have an accountable plan set up correctly, so you can take this deduction.