Using Accountable Plans for Expense Reimbursements

8 minute read

When the Tax Cuts and Jobs Act (TCJA) was signed into law in late 2017, Congress temporarily disallowed the tax deduction for out-of-pocket business expenses.

Starting in 2018 and through tax year 2025, employees who incur unreimbursed work-related expenses can no longer deduct those costs on their personal tax returns. Fortunately, this disallowance is only temporary. In 2026, unreimbursed business expenses that exceed 2% of adjusted gross income will once again become deductible.

Knowing their employees lost these deductions (even if only temporarily), employers might be encouraged to start reimbursing their employees for out-of-pocket business expenses. Operating an accountable plan is the best way to do this.

What Is an Accountable Plan?

An employer’s accountable plan reimburses employees for out-of-pocket business expenses.

When a business reimburses employees for expenses eligible under their accountable plan, those payments will not be subject to payroll taxes, and they will not increase an employee’s W-2 salary or affect their withholding. Instead, these costs will be reported on the business’s return as if the business had paid the expense directly.

What Are the Benefits of Accountable Plans?

Accountable plans benefit both employers and employees.

Benefits to Employers

Employers who reimburse employees using accountable plans will pay fewer payroll taxes. If accountable plan guidance isn’t followed, those reimbursements are subject to W-2 reporting and payroll taxes. This would effectively transform a deductible business expense into payroll, which would subject the business to additional social security tax, Medicare tax and unemployment compensation.

Benefits to Employees

When employees are reimbursed under accountable plans:

  • They are paid back for business expenses 
  • They don’t have to report unreimbursed business expenses on their tax returns (which are not currently deductible anyway) 
  • They won’t be taxed on those reimbursements as W-2 income

How Does an Accountable Plan Work?

To reimburse employees for business expenses under an accountable plan, a few things must happen:

Employees must report expenses timely.

In general, employees have 60 days to request reimbursement from their employer. If they receive payments in advance, they must incur that business expense within 30 days.

Employees must itemize expenses.

Employees should provide their employers with detailed information about their expenses. One exception to this rule is expenses covered by per diems. For example, if meals are reimbursed using the IRS’s per diem rate, the employee does not need to substantiate their meals costs.

Employees must provide proof of expense.

In most cases, itemized receipts are required, but some expenses may still be eligible if receipts aren’t readily available (like subway or bus fare).

Excess reimbursements must be returned (except for per diems).

If employees are given advances or reimbursements that exceed the expenses they incurred, they must return that excess to the employer within 120 days. The one exception to this rule is per diems. If employers reimburse employees using federal per diem rates as set by the US General Services Administration, employees can keep the entire per diem balance, even if their per diem exceeds actual expenses.

Shared expenses must be accounted for appropriately.

If expenses have both a business and a personal component, the business portion may still be paid using an accountable plan, as long as those costs are bifurcated. Consider the situation when an employee uses a company car for both business and personal use. To be reimbursed for the business portion of gasoline costs, the employee can allocate total gasoline costs between personal and business uses based on mileage.

Employees must incur expenses while performing job duties.

Expenses must have a business connection to be eligible for reimbursement under an accountable plan. Which brings us to our next topic…

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Which Expenses Can Be Reimbursed Using an Accountable Plan?

Ask yourself: if the business had incurred the expense or paid for the expense directly, would it have been deductible? If so, the expense will likely be eligible under an accountable plan. Eligible expenses might include:

  • Travel
  • Gas or mileage
  • Materials
  • Equipment (like a business cell phone)
  • Training
  • Professional licenses
  • Dues and subscriptions
  • Internet or network capabilities
  • Depreciation on home office or vehicles used for business purpose

What Are the Compliance Requirements?

Accountable plans don’t need to be formalized in writing, but in the event they are audited, businesses would be wise to have written policies in place that show they follow accountable plan guidance.

What Happens if the Accountable Plan Rules Are Not Met?

Reimbursements that do not follow all accountable plan guidelines will be considered taxable to the employee as wages. This would increase their W-2 wages and their income tax withholdings, and it would raise payroll taxes for both the employer and the employee.

How Does an S Corp Accountable Plan Work?

When operating under TCJA-era laws, all employers can benefit from accountable plans. Accountable plans effectively shift business expenses away from employees (who cannot deduct those expenses) to the business (which can). But S corporations find accountable plans especially helpful.

S corporation owners who are also employed by the business (known as “owner-employees”) tend to have higher out-of-pocket business expenses than non-owner-employees of the business. If they so choose, the S corporation can elect an accountable plan and use it only for owner-employees. For example, owner-employees may work from their home office in the evenings when other employees are less likely to be working. The S corporation can help offset the costs of owner-employees’ home offices by reimbursing them, but they don’t need to feel obligated to do the same for non-owner-employees.

Is an Accountable Plan the Right Path Forward?

Accountable plans are simple to implement and have little ongoing compliance needs. Business owners who are reimbursing employees without an accountable plan have nothing to lose by tweaking a few procedures so that they qualify for one.

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