If you’re like most entrepreneurs these days, you are looking for every possible way to save money so your company can stay afloat and make it through these difficult times. We encourage you to take advantage of and (quickly) apply to every relief option offered by the state and federal government. On your own, you should look at a number of tax-reduction strategies; this blog will take a look at one of these strategies, known as an “accountable plan.”
What is an Accountable Plan?
Often, when an employee of a business is reimbursed because he or she incurred expenses or used personal assets for business purposes, the reimbursed money is treated as taxable income by the IRS. However, this can be avoided by using an accountable plan for your business. Essentially, an accountable plan is a process by which employees send expense reports to his or her employer, which the employer then reimburses in a clear (and accountable) way. One of the simplest ways to do this is by writing a check for the exact amount reported in the expense report. Even business owners who are employees can be eligible to participate in an accountable plan.
The IRS has existing guidance on how your accountable plan must be structured. However, you are not required to submit your particular accountable plan to the IRS in order for it to be effective. Any surplus money reimbursed to employees (money not accounted for in expense reports) will be considered taxable income and must be reported on the employee’s W-2.
Business-related costs must generally meet these two conditions:
- The expenses must be incurred during the course of employment
- If any business and personal costs are co-mingled, clear distinctions must be made between the two types of expenses
Examples of business-related expenses employees are reimbursed for include meals, hotel stays, and travel expenses incurred during a business trip. Some business-related expenses are co-mingled with personal expenses and are, therefore, more difficult to keep track of. Examples of these mixed-use expenses include cell phone plans, home offices, and car mileage.
Tips For Making Your Accountable Plan Work
Keeping meticulous records is the most important thing you can do as a business owner. Receipts from business trips are crucial. Executing your accountable plan’s reimbursement method every month is required by law. Also, your memory may not be as reliable going back a full year, and certain documents might get lost or misplaced, making the plan susceptible to scrutinization by the IRS.
Conclusion
Attorney Tyler Q. Dahl is passionate about helping business owners save money by minimizing tax obligations. Dahl is also a Certified Tax Coach, a distinction enjoyed by fewer than 100 attorneys nationwide. During the COVID-19 pandemic, please do not hesitate to call the firm at 916-545-2790 for a remote consultation.
Dahl Law Group
