{"id":3716,"date":"2019-09-09T15:45:02","date_gmt":"2019-09-09T15:45:02","guid":{"rendered":"https:\/\/patellawoffices.com\/blog\/?p=3716"},"modified":"2020-09-29T15:48:04","modified_gmt":"2020-09-29T15:48:04","slug":"start-or-review-an-accountable-plan","status":"publish","type":"post","link":"https:\/\/patellawoffices.com\/blog\/planning-for-tax-minimization\/start-or-review-an-accountable-plan\/","title":{"rendered":"Start or review an \u201cAccountable Plan\u201d"},"content":{"rendered":"\n

Accountable Plans, established under IRS Reg. Section 1.62-2(c)(4),<\/a> are important tools to help a business optimally classify expenses paid to employees without fear of the payments being treated as taxable compensation.<\/p>\n\n\n\n

The 2017 law known as the Tax Cuts and Jobs Act (TCJA), redefined\nthe deductibility of business expenses and disallowed the deduction of out-of-pocket expenses paid by employees on\ntheir personal tax return. Given the changes, it is a good time for advisors to\nestablish their clients’ Accountable Plans.<\/p>\n\n\n\n

A good Accountable Plan\ncreates tax savings both for you and your employees.  An Accountable Plan is a list of guidelines that\nexplains how you will reimburse expenses, and which expenses qualify for\nreimbursement. Accountable\nplans work on the simple concept that if reimbursement payments to business\nowners and their employees are properly claimed and documented, they are not\ntaxable to the recipient. Conversely, if reimbursements are not legitimate\nbusiness expenses or are not properly documented, they are taxable income to\nemployees. Accountable plans are a flexible tool to incentivize employees to\npursue business goals and to facilitate employee-owners’ deductions of expenses they\nincur in running their businesses.<\/p>\n\n\n\n

FROM THE EMPLOYER’S POINT\nOF VIEW<\/h2>\n\n\n\n

To\noffer an Accountable Plan, an employer must comply with three standards:<\/p>\n\n\n\n

  1. The expenses must have a business connection;<\/li>
  2. The expenses must be substantiated within a reasonable period;\u00a0and<\/li>
  3. The employee must return any money not spent to the employer, also within a reasonable\u00a0period.<\/li><\/ol>\n\n\n\n

    If\nany of the three conditions is not met, the reimbursement arrangement is\ntreated as a non-Accountable Plan. In other words, the reimbursements are\ntaxable compensation to the employee and subject to employment taxes.<\/p>\n\n\n\n

    BUSINESS CONNECTION<\/h2>\n\n\n\n

    Before\na reimbursement can be made, the employer must authorize the purchase for a\nlegitimate business purpose. A purchase for a legitimate business purpose is\nanything that is deductible under Regs. Sec. 1.62-2, including:<\/p>\n\n\n\n

    • Travel expenses (either actual or\n per diem);<\/li>
    • Gas or mileage expenses (either\n actual or per diem);<\/li>
    • Tools and supplies;<\/li>
    • Home office, including\n depreciation;<\/li>
    • Cellphone;<\/li>
    • Internet;<\/li>
    • Training and development; and<\/li>
    • Dues, subscriptions, and professional licenses.<\/li><\/ul>\n\n\n\n

      Reimbursing\nan expense does not change the deductibility of the expense itself. For\ninstance, meals may be reimbursed at 100% of the cost, even though the expense\nis only 50% deductible by the company. Entertainment expenses are no longer\ndeductible as such at all under the TCJA (Sec. 274(a)(1)). If an employer\nreimburses entertainment expenses, the reimbursement must be treated as wages\n(Regs. Secs. 1.62-2(c)(5) and 1.62-2(d)). Examples of nondeductible\nentertainment expenses under the TCJA include (Regs. Sec. 1.274-2(b)(1)(i)):<\/p>\n\n\n\n

      • Nightclubs;<\/li>
      • Cocktail lounges;<\/li>
      • Theaters;<\/li>
      • Country clubs;<\/li>
      • Golf and athletic clubs;<\/li>
      • Sporting events; and<\/li>
      • Hunting and fishing.<\/li><\/ul>\n\n\n\n

        Reimbursement\nfor small tools can be a gray area that should be documented carefully (see\nRev. Rul. 2012-25 and IRS Letter Rulings 200930029\nand 201120021). In instances where employees are required to routinely provide\ntheir own tools and materials, reimbursement schemes should not resemble wages.\nFor instance, if a janitor is required to provide his or her own cleaning\nsupplies and is paid $200 per day, an employer cannot simply designate $50 of\nthe janitor’s pay as reimbursed cleaning supply expense. If the employee would\nreceive the same amount of compensation anyway, the business connection\nrequirement is not met. Reimbursements must have a clear correlation to actual expenses.<\/p>\n\n\n\n

        Proving\ntelephone and internet expenses can test practical limits as well. Telephone\nexpenses reimbursed under an Accountable Plan must be for telephone calls made\nwith a real business connection. This means substantiating the reimbursement\namount with actual billing statements, with business calls noted and an offset\nfor the cost that the employee would have paid anyway. This level of paperwork\ncan be daunting. While these expenses can be reimbursed under an Accountable\nPlan, consider a set dollar reimbursement instead, which can be accomplished by\ntreating the expense as a working-condition fringe benefit under Sec.\n132(a)(3) (see also Notice 2011-72 and IRS Small Business\/Self-Employed field\nmemo SBSE-04-0911-083).<\/p>\n\n\n\n

        Accountable\nplans can be structured to provide advances or allowances that are\nsubstantiated after the fact. For example, a brokerage might offer a set meals\nallowance that is based on the revenue generated by a broker group. However,\nthe recipients must document that all the dollars were spent for business\nactivity. Detailed expense reports help to distinguish Accountable Plan\nreimbursements from non-Accountable Plan allowances. For instance, a car\nallowance with no requirement to account for mileage, dates, and destinations\nshould be fully reported on the employee’s Form W-2, Wage\nand Tax Statement<\/em>, as wages, even if the employee incurs substantial\nbusiness mileage.<\/p>\n\n\n\n

        Accountable\nplans are not employee benefit plans and do not have to follow the\nnondiscrimination rules applicable to employee benefit plans. A business can\nreimburse an owner, but not other employees, for a home office, for example. An\nemployer can have different arrangements with different employees, and if one\nemployee fails to comply with the plan requirements, only that employee will be\naffected.<\/p>\n\n\n\n

        SUBSTANTIATION<\/h2>\n\n\n\n

        “Substantiated”\nmeans the employer must collect documentation that shows the amount, time,\nplace, and business purpose of the expense. This generally entails an account\nbook, log, receipt, bill, or credit card statement. It doesn’t have to be the\noriginal, but the proof must be specific enough to differentiate the types of\nexpenses. For instance, a credit card statement for a hotel expense would not\nbe enough unless it clearly separated meals and entertainment from an overnight\nstay expense. A list of categorized expenses is also not enough, unless the\nindividual purchases are detailed and supported. The required documentation is\ncovered under two different sections of the Code.<\/p>\n\n\n\n

        REIMBURSEMENTS AND PER\nDIEMS<\/h2>\n\n\n\n

        Businesses\nand their employees may rely upon federal per-diem tables and mileage allowances\nto report meal and travel expenses rather than documenting specific costs. This\nis true even if the amount claimed is less than the amount the employee spent.\nEmployers must still retain dates, times, and the business purpose of the\nexpense. If your client is using per-diem reimbursement amounts, be sure\nto adjust for cost differences in different areas for per-diem amounts\nand prorate for partial days of travel.<\/p>\n\n\n\n

        The\nfederal rate for travel can be figured in different ways: the federal per-diem rate,\nthe standard meal allowance, or the high-low rate (see Rev. Proc. 2011-47 for\nrules and Notice 2019-55 for the relevant rates for the\nperiod Oct. 1, 2019, through Sept. 30, 2020).<\/p>\n\n\n\n

        Business\nowners and related parties cannot themselves use per-diem amounts to prove their\nexpenses. Owners must provide actual receipts in all circumstances. Expenses\nrelated to an employee’s spouse and family attendance at business events are\nnot deductible and not reimbursable under an Accountable Plan, unless it can be\nclearly shown that the family presence has a bona fide business purpose.<\/p>\n\n\n\n

        For\npayments made to independent contractors under a reimbursement plan, the 50%\nlimitation on meal expenses might not apply. If the independent contractor has\nnot fully accounted for the meal expenses, the business would treat the\npayments as made to the contractor for services rendered. If the meal expenses\nare fully accounted for, the meal expenses would be 50% deductible by the business\n(Regs. Sec. 1.274-2(f)(2)(iv)). Businesses and independent\ncontractors can stipulate how meal expenses are treated in their contract.<\/p>\n\n\n\n

        Car\nexpenses can be reimbursed at the standard mileage rate or the fixed and\nvariable rate. If an individual receives reimbursements using the IRS mileage\nrate, actual expenses need not be substantiated, but other elements of business\ndriving (date, mileage, destination, etc.) must be reported to the employer\nusing an expense account report, app, or other written record.<\/p>\n\n\n\n

        Regs.\nSec. 1.274-5(c)(2)(iii)(A)(2)\nprovides some flexibility in the types of documentation necessary to prove an\nexpense. Individual Sec. 274 expenses of less than $75 do not require a\nspecific receipt, with the express exception that lodging expenses, regardless\nof amount, must be documented (Regs. Sec. 1.274-5(c)(2)(iii)(A)(1)).<\/p>\n\n\n\n

        SUBSTANTIATION: SMALL\nAMOUNTS<\/h2>\n\n\n\n

        The\nIRS acknowledges that it may be difficult for small businesses to maintain\ndetailed records and supporting documents for all expenses. The Service allows\nsome latitude in the collection of data, stating, “Detailed records of\nsmall expenditures … as for example, tips, will not be required” (Regs.\nSec. 1.162-17(d)(2)).\nHowever, Regs. Sec. 1.162-17 does not offer a de minimis<\/em> amount for this purpose. The\nIRS’s idea of proper substantiation is “the preparation of a daily diary\nor record of expenditures, maintained in sufficient detail to enable [a\ntaxpayer] to readily identify the amount and nature of any expenditure, and the\npreservation of supporting documents”. The burden of proof is on the\ntaxpayer, and it is wise to counsel clients to preserve enough documentation to\navoid any discussion of adequacy with an agent. The IRS is more likely to give\nlatitude for missing receipts if the taxpayer can show otherwise detailed and\naccurate support for the expenses that are claimed.<\/p>\n\n\n\n

        ‘REASONABLE PERIOD OF TIME’<\/h2>\n\n\n\n

        The\nIRS allows that “a reasonable period of time” in requirements 2 and 3\nfor an Accountable Plan (see “From the Employer’s Point of View”\nabove) depends on the facts and circumstances. However, in Regs. Sec. 1.62-2(g)(2)\nit offers two safe harbors:<\/p>\n\n\n\n

        • Fixed-date\u00a0method:<\/strong>\u00a0An advance is acceptable if it is made within 30 days of when the expense is paid or incurred. An expense must be substantiated to the payer within 60 days after it is paid or incurred. Repayment of any overpaid advance must be made within 60 days after the expense is paid or incurred.<\/li>
        • Periodic-statement\u00a0method:\u00a0If the business provides at least quarterly statements detailing any payments in excess of the amount substantiated by an employee and requesting substantiation of additional business expenses or requesting the return of overpaid advances within 120 days of the statement, an expense substantiated or amount returned within that time will be treated as substantiated or returned in a reasonable time under the safe harbor.<\/li><\/ul>\n\n\n\n

          Relying instead on facts and circumstances gives an employer more flexibility but requires more diligence. In one case, the taxpayer submitted expense reports annually but also provided a receipt of each expenditure at the time of each purchase. Since the employer was informed of each expenditure when it was made, the submission of the detailed reimbursement request once a year was enough (Namyst<\/em>, T.C. Memo.\u00a02004-263, 435 F.3d 910 (8th Cir. 2006)).<\/p>\n\n\n\n

          As\nnoted above, employers can offer an advance account to cover employee expenses.\nHowever, if the employee does not actually spend the advance on business\npurchases, the overpayment must be returned. The IRS says a “reasonable\nperiod” in this case is 120 days. In practice, the employer needs to try\nto match expenses to the reimbursement in a timely way. Estimates, even if\nreasonable, are not acceptable (Rev. Rul. 2005-52). The regulations provide that the\n“reasonable period” safe harbors are not available to businesses that\nregularly overestimate advances versus expenses (Regs. Sec. 1.62-2(g)(3)).<\/p>\n\n\n\n

          REQUIREMENTS FOR A WRITTEN\nPOLICY<\/h2>\n\n\n\n

          An\nAccountable Plan need not be in writing; however, a written document optimally provides\na structure to ensure that the three required elements are addressed. A written\nexpense reimbursement policy should clarify:<\/p>\n\n\n\n

          • The time period for employees to submit expenses;<\/li>
          • The process for requesting reimbursement, including what documents are required to prove the request;<\/li>
          • The process for returning excess reimbursements or allowances;<\/li>
          • The types of expenses that are reimbursable;<\/li>
          • The maximum allowable amount for certain expenses; and<\/li>
          • Preferred suppliers for reduced expenses.<\/li><\/ul>\n\n\n\n

            FROM THE EMPLOYEE’S POINT\nOF VIEW<\/h2>\n\n\n\n

            The\nTCJA has changed the landscape for employees who pay out-of-pocket business expenses. Before the\nTCJA, if an employer did not provide an Accountable Plan, or if the employee\ndid not receive reimbursement, the employee could deduct those expenses under\nSec. 67(b) on his or her own Form 1040, U.S.\nIndividual Income Tax Return<\/em>, on Schedule A, Itemized\nDeductions<\/em>, as a miscellaneous itemized deduction subject to a 2%-of-AGI threshold.\nUnder the TCJA’s new Sec. 67(g), these miscellaneous itemized deductions are\nsuspended for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.\nEmployees must now choose between spending for business expenses without any\ndeduction benefit and complying with an existing employer Accountable Plan or,\nwhere an employer does not offer one, requesting that the employer institute one.<\/p>\n\n\n\n

            If\nan employer has an Accountable Plan but incorrectly reports expense\nreimbursements as income to an employee on his or her Form W-2,\nthe employee should request a corrected W-2.<\/p>\n\n\n\n

            Conclusion<\/h2>\n\n\n\n

            Accountable\nplans are excellent tools to help a business owner recapture expenses paid on\nbehalf of the company, without fear of the payments being treated as\ncompensation or as an equity contribution.<\/p>\n","protected":false},"excerpt":{"rendered":"

            Accountable Plans, established under IRS Reg. Section 1.62-2(c)(4), are important tools to help a business optimally classify expenses paid to employees without fear of the payments being treated as taxable compensation. The 2017 law known as the Tax Cuts and Jobs Act (TCJA), redefined the deductibility of business expenses and disallowed the deduction of out-of-pocket expenses paid […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_daextam_enable_autolinks":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-3716","post","type-post","status-publish","format-standard","hentry","category-planning-for-tax-minimization"],"_links":{"self":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/3716","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/comments?post=3716"}],"version-history":[{"count":1,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/3716\/revisions"}],"predecessor-version":[{"id":3720,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/3716\/revisions\/3720"}],"wp:attachment":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/media?parent=3716"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/categories?post=3716"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/tags?post=3716"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}