submitted by Martin H. Abo, CPA/ABV/CVA/CFF, Abo and Company, LLC
An employer can operate an accountable plan that reimburses employees for the actual amount of their business-related expenses. Alternatively, an accountable plan can pay predetermined allowances for designated expenses. Either approach is okay with the IRS, as long as the applicable rules are followed.
- Tax Impact of Accountable Plan. When the Company’s expense reimbursement or allowance arrangement qualifies as an accountable plan, the business can deduct the payments made under the plan for federal income tax purposes (meals and entertainment reimbursements still subject to the 50% disallowance). Thus, the payments under an accountable plan are basically treated the same as tax-free employee fringe benefits. This is beneficial for employers and employees alike. Everybody’s happy!
- Tax Impact of Non-Accountable Plan. The accountable plan rules must be met on a employee-by-employee basis. If reimbursements or allowances paid to an employee fail to meet the accountable plan rules, the payments should be treated as wages. This non-accountable plan treatment generally results in 100% deductibility for the firm because the 50% disallowance rule for meal and entertainment expenses doesn’t apply to the employer for amounts reported as wage compensation to an employee. Even so, employer clients may still come out on the short-end because it must pay the employer’s half of the FICA tax and the FUTA tax on amounts treated as wages.
- For the employee, wage treatment is clearly disadvantageous because wages are subject to: (1) federal income tax (including FIT withholding) and (2) withholding for the employee’s half of the FICA tax. Assuming the employee can document that he or she incurred legitimate expenses, the only hope for any tax benefit is to claim a Schedule A itemized deduction for unreimbursed employee business expenses—after subtracting the 50% disallowance for meals and entertainment. Unfortunately, unreimbursed employee business expenses can only be written off to the extent they exceed 2% of the employee’s Adjusted Gross Income (AGI) when lumped together with other miscellaneous itemized deductions.
- Typically only the tax collector is happy with the results under a non-accountable plan. That’s why meeting the accountable plan rules is so important.