Accountable plans

A clear plan lets businesses pay back employees for work costs without extra taxes. With this plan, employees can turn in expenses, like travel or other business costs, to get their money back. Having a plan helps both the business and the employees. Here are some examples:

Following IRS Rules: A clear plan makes sure you follow the IRS rules for paying back work costs. This lowers the chance of fines and interest. This includes using part of your home for work, which can be a big tax break for home-based care providers.

Tax Savings: With a clear plan, money paid back to employees for work costs is not taxed. This lowers the amount of tax employees owe. It also lets employers take these costs off their business taxes.

Happier Employees: Paying back work costs can make employees feel more valued and supported. This can lead to happier, more productive workers. It also makes sure employees are not stuck paying for costs the business should cover.

Making a clear plan for your business is simple. First, you should learn the IRS rules. Here are some key things to know:

• Business Purpose: The IRS requires that expenses be reimbursed under an accountable plan and have a clear business purpose. This means the expenses must be directly related to the business operations and be deemed necessary and ordinary in the context of the industry. 
• Substantiation: To get money back, you and your employees must give proof of the costs. This means keeping receipts, bills, or other records. These records must show what the cost was for, when it happened, how much it was, and why it was for the business. Employers should have clear rules about what proof is needed to make sure they follow the IRS rules.
• Timely Reporting: Employees should report their costs to the employer quickly. The IRS usually thinks 60 days after the cost happened is a good reporting time. If you wait too long to report, you might not get the money back under the clear plan.
• Excess Reimbursement: If employees get too much money back, or get money early, they should return it to the employer quickly. You and your employees must pay back the extra money within a reasonable time. This is usually 120 days after the cost was paid or happened.
• No Profits or Losses: The IRS guidelines stipulate that an accountable plan should not result in a financial gain or loss for employees. In other words, you and your employees should be reimbursed for the exact amount they spent, without making a profit from the reimbursement.   

Next, assess your business needs and determine which expenses are eligible for reimbursement. Write down the details of your plan. This should include what costs can be paid back, what proof is needed, and how to get the money back.

Here are several components typically included in an accountable plan:  

1. Introduction: Explain the purpose of the accountable plan and the types of expenses that will be reimbursed. 
2. Eligible expenses: List the kinds of costs that will be paid back, like travel, meals, and entertainment. Make sure to include any rules about what will not be paid back.
3. Record-keeping requirements: Explain what proof employees must keep to get their money back. For example, employees might need to turn in receipts or expense reports. These should include the date, amount, and business reason for each cost.
4. Reimbursement procedures: Explain how employees should ask for money back. This includes what forms they need to fill out and how long they have to turn in their requests.

Here's an example of an accountable plan:   

XYZ Company's Accountable Plan  

1. Written Policy: XYZ Company writes down a clear plan that explains the rules for paying back the owner's and employees' costs. The plan is shared with all employees. It gives clear steps on what costs can be paid back, what proof is needed, and how to ask for the money back.
2. Business-Related Expenses: With the clear plan, XYZ Company will pay employees back for costs that help them do their jobs. These may include travel, food and fun with clients, hotels, getting around, and other costs related to work.
3. Expense Reimbursement Process: Employees must turn in a list of their costs within a good time, usually 30 days after they spent the money. The list should have the date, what the cost was for, and why it was for work. They should also add any papers that prove the cost, like receipts.
4. Substantiation of Expenses: Employees must prove each cost they had. They need to give real receipts, bills, or other papers that show they paid. XYZ Company wants employees to keep good records to prove what they spent.
5. Timely Reimbursement: Once the employee's expense report is submitted and approved, XYZ Company will reimburse the employee for the documented expenses in a reasonable timeframe, usually within the next payroll cycle. The reimbursement will be based on the actual expenses incurred and supported by valid documentation. 
6. Return of Excess Reimbursements: If an employee gets money ahead of time or gets too much money, they must give the extra money back to XYZ Company in a set time. This makes sure employees do not get more money than they spent.
7. Tax Compliance: XYZ Company follows all tax laws when using the clear plan. This means the money paid back is not counted as part of the employee's pay, if the costs meet the IRS rules for work costs.

Remember, don’t be afraid to consult with a tax professional or accountant who can provide personalized guidance based on your business's needs. If you have questions or concerns, they can help you navigate the process and ensure that your accountable plan is set up correctly.   

After you write your plan, tell your employees about it, if you have any. Set up how they will turn in lists of costs and proof. Teach your employees about the plan so they follow the rules. Have them sign a paper saying they know the plan and will follow it.

After you start your plan, check it from time to time. Look at papers, check costs, and make sure the money paid back is correct. This makes sure you follow the IRS rules.

Last, check and change the plan as needed. This is to keep up with any changes in IRS rules or company plans. You might talk to a tax expert, check how well the plan is working, and tell employees about any changes.

Business owners sometimes forget that a clear plan must follow IRS rules, even if costs are paid through the plan. To follow IRS rules, a clear plan must only pay back costs that:

1. A Business Connection: Costs paid back under the clear plan must be clearly for the business. They should be for doing job duties or for the employer's business. If something is used for both work and personal reasons, there must be a clear way to figure out how much is for work. Only that part should be paid back.
2. Substantiation: Employees must prove each cost with papers. This includes receipts, bills, or other papers that show they paid. The papers should show how much the cost was, when it happened, where it happened, and why it was for the business.
3. Timely Reporting: Employees should turn in their list of costs soon after they spend the money, usually within 30 days. If they turn it in late, they might not get the money back without paying taxes.

This is also true for using part of your home for business. For example, home-based care providers must follow all the IRS rules for home use even if they use a clear plan. This includes using their time and space to figure out how much is for business.

Using a clear plan is a good idea for employers who want to pay back employee costs and follow IRS rules. By using the steps above and managing the plan well, employers can save money on taxes, follow the rules, and make employees happier. If you need help, talk to small business groups, industry groups, or look online at the IRS website. This can help you change the plan to fit your needs.

Disclaimer 

The information contained here is for educational purposes only and is not intended to constitute legal, tax, or financial advice.