Expenses 101: Preparing an Accountable Expense Reimbursement Plan

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Every deductible business expense reduces a business's taxable income. When an employee incurs an expense while providing services for the business, those expenses are deductible business expenses IF the employer reimburses his employee for the expenses.

However, some businesses don't benefit from those deductions because they fail to have what the IRS refers to as an Accountable Expense Reimbursement Plan.

Without an accountable plan, expense reimbursements to an employee become taxable income to the employee. This costs both the employer and the employee money. The employee has to pay income taxes on the reimbursements. The employer may still have a tax deduction in the form of wages paid, but the employer incurs the additional cost of paying Social Security, Medicare, and FUTA taxes on those wages.

On the other hand, some employers have suffered during an IRS audit because they failed to have a written accountable plan, either as a separate document or as part of an employee manual, thus resulting in their employees failing to properly document business expenses. So what should a written plan include? The following is a brief outline of what an accountable expense reimbursement plan may contain.

• Introduction

• Brief introduction to define an accountable plan and why employees must conform to its provisions.

• Review of Legal Requirements

• Employee Record Keeping Requirements

• Company Policies Regarding Travel ExpensesHow to Submit Business Expenses

• Policies Regarding Employer Review and Timing of Reimbursements

• Special Situations