For those who may not be familiar with an “accountable plan”, let’s begin by explaining what a “non-accountable” plan is. Non-accountable plans are where the employer provides the employee with an expense allowance with no requirement to account for the expense. Non-accountable reimbursements are taxable to the employee and subject to payroll and income taxes. While the employee can claim such expenses on Schedule A on Form 1040, Sch. A limitations may limit all or a portion of the deductible amount.
One solution to the above problem is for the employer to adopt an accountable plan. These plans are used by many companies to reimburse their employees for expenses incurred by the employee on behalf of the employer. The employee submits an expense report (with proper documentation) for the expenses incurred within a reasonable time of incurring the expense, the employer reimburses the employee for such expenses, the company receives a tax deduction for the reimbursed expenses, and the reimbursement is not included as compensation to the employee and is thus not subject to payroll or income taxes (assuming that the reimbursement does not exceed the expense incurred). While there is no requirement that such plans be in writing, it would be a good idea to have the plan be in writing. Why? The IRS likes to see documentation and a written plan provides clear guidelines between the employer and employee as to what is reimbursable by the employer.
What is a reasonable time for the employee to submit the expense? While the test is based on a facts and circumstances test, safe harbor rules are that the expenses advances are received within 30 days of the expense being incurred; expenses are adequately documented within 60 days that they were paid or incurred, and any excess reimbursement (e.g., when expense advances exceed the actual expenses incurred) are returned within 120 days after the expense was incurred.
The IRS has issued Rev. Rul. 2012-25 which provides four detailed examples of what types of arrangements qualify to be excluded from tax under the IRC Sec. 62(c) “accountable plan” rules. While this blog will not analyze each of the four examples, let’s look at the IRS requirements.
IRS Reg. 1.62-2(c) states that IF a reimbursement or other expense allowance meets the three requirements of (1) business connection, (2) substantiation, and (3) returning amounts in excess of substantiated expenses, all amounts paid under such an arrangement are treated as paid under an accountable plan. If the arrangement fails ANY of these three requirements, then the reimbursement will be considered as made under a non-accountable plan, resulting in taxable income subject to income and payroll taxes.
Be sure to read the Disclaimer Page on this blog. Blog postings are for educational purposes only and are not to be construed as the rendering of tax advice.