What is an Accountable Plan?
An Accountable Plan is a reimbursement policy and expense reporting system that allows owners and their employees to turn in expense reports to the business for reimbursement in a way that keeps that those amounts from being counted as taxable income.
Why is it important to have an Accountable Plan?
Because if you reimburse yourself for business expenses, without an Accountable Plan, that money may be considered taxable income. You in turn have to deduct those expenses as unreimbursed business expenses subject to itemized deductions and income thresholds. Deducting and reimbursing are different, and can have an impact on what you pay in taxes.
How do I put an Accountable Plan into effect?
Below is a list of steps for establishing an Accountable Plan.
3 Steps to Setting Up an Accountable Plan:
- Review last year's figures in each business-related expense category. Decide what types of expenses will be covered and adopt a written reimbursement policy that identifies them.
Important to note:
- The expense must have a business purpose related to the owner or employee duties.
- Owners and employees must identify the expense with a receipt and documentation (substantiation) that verifies the amount, date, place and business purpose.
- Owners and employees should provide documentation in a timely manner after incurring the expense.
- Advances can be given to provide for anticipated expenses, but any unused funds from the advance (or unsubstantiated funds) must be returned to the business.
- Create an expense report template. When owners and employees incur a reimbursable expense, they need to fill out and submit this report detailing each expense, including the purpose and amount.
The business will then reimburse these expenses from a business bank account to yourself or the employee as detailed in the expense report. In other words, the business must actually pay out the reimbursement amount.
- At least quarterly, your approved and reimbursed expense reports should be archived, and expenses entered into the business’ bookkeeping.
Setting up an accountable plan is not hard, but it is a process that must be followed if you want it to be effective.