At the most basic level, an accountable plan allows an employer to provide tax free reimbursement of qualified business expenses to an employee. Sound simple enough, and it can be if you take the steps to ensure you follow the IRS rules regarding accountable plans.
Here's how It works
If you are an S or C Corp owner/shareholder, adopting an accountable plan has the potential to provide you with a tax free reimbursement of the typical expenses that you are likely already incurring on behalf of your corporation. Remember, as a Corporation owner/shareholder, you are also classified as an employee since you receive a Form W-2 for the services you provide to your corporation.
Under the Tax Cuts and Jobs Act of 2017, you (and your employees) are no longer allowed to personally deduct any business expenses that have been incurred on behalf of your business. If you receive a Form W-2, the IRS considers you an employee, so you are no longer eligible for a personal deduction for any business related expenses.
For example, if you or an employee of your company drives a personal vehicle for business purposes, there is no longer a deduction for the employee on the employee's tax return. The only option for reimbursement is for the employee to submit their mileage expense documentation to their company for reimbursement. In order for this reimbursement to be tax free, it must be under an established accountable plan.
An accountable plan is generally the only way you can reasonably reimburse yourself and your employees for expenses that you and your employees incur on behalf of your business. If done properly, the cash reimbursement is tax free and still a deductible business expense.
As a warning, there are some pitfalls. If you do not properly establish and maintain an accountable plan, you are operating what the IRS deems a nonaccountable plan. Under a nonaccountable plan, payments to yourself and your employees are not considered tax free reimbursements and are considered compensation. All amounts paid under a nonaccountable plan must be reported on Form W-2 as compensation and are subject to withholding and payment of payroll taxes.
How we can help you save money
Maryland Tax Service, Inc can help you properly establish an accountable plan to make the tax code work in your favor. We can provide you with the necessary documentation and processes so you can provide tax free reimbursements to yourself and your employees for all qualified business expense reimbursements.
Our pricing starts at $300 to assist in establishing an accountable plan, and is based on entity complexity, number of employees, home office use, and more. From our experience, this service can easily pay for itself in tax savings in the first year of use.
Thank you for your interest in our tax service! At this time, we are not accepting new tax clients. If you would like to join our waiting list, please let us know.