Accountable Plans as per the IRS Code Section 62(c) and IRS Regulation

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1 Accountable Plans as per the IRS Code Section 62(c) and IRS Regulation To save yourself and your employees some payroll tax expenses, the Internal Revenue Code and the IRS regulations allow expenses to be deductible for a business and not income to the employee who is being reimbursed for his business expenses if, and only if, the reimbursements are made under an accountable expense reimbursement plan. To be an accountable plan, the reimbursement program must have these characteristics: Business connection of expenses; Proper substantiation of expenses; Written plan requiring that employees return to the employer reimbursed amounts in excess of actual expenses incurred; The actual return by employees within a reasonable time, of reimbursed amounts in excess of actual expenses incurred; and Any advance made by an employer to an employee must be reasonably calculated and must not be expected to exceed the amount of reasonably anticipated expenditures to which such advance relates. The result of not meeting the requirements of an accountable plan is that the money that is paid to the employee is taxable compensation to the employee. The employee can then deduct his business expenses on his individual income tax return but only on Schedule A as a miscellaneous itemized deduction subject to 2% AGI. Each of the five accountable plan requirements is highlighted in detail below: I. Business Connection A reimbursement arrangement has a business connection if through it the employer in good faith provides advances, allowances or reimbursements for deductible business expenses incurred by the employee in connection with the performance of services as an employee. A reimbursement arrangement will fail the business connection requirement if the employer does not reasonably believe that the employee will use the reimbursement to pay for deductible expenses. II. Proper Substantiation There are two categories of expenses to which the substantiation rules apply: Code Section 274 Expense Items. Basically, the written substantiation required relating to a specific expenditure is that the who, what, where, when, why and how much information related to the expenditure must be documented in writing. For example, for listed property such as business cars, actual substantiation must meet the following four requirements: The amount of the expense (repairs, gas, depreciation, etc.) Business use (number of business miles) Time (date) of use, and Business purpose of business use (name of customer will do)

2 Other Expense Items. For employee business expenses that do not fall within Code Section 274 (such as professional journals, professional dues, etc.) an employee is considered to have substantiated expenses for this purpose if information submitted is sufficient to enable the person providing the reimbursement to identify the specific nature and amount of each expense and to conclude that the expense is attributable to the employer business activities. It is not sufficient if an employee merely aggregates into broad categories (such as travel ) or reports individual expenses through the use of vague, nondescriptive items (such as miscellaneous business expenses ) III. IV. Written Plans The determination of whether an expense reimbursement plan required an employee to return amounts received from the employer to the employer in excess of substantiated expenses will depend on the facts-and-circumstances. The easiest and perhaps the only way to prove that the arrangement requires an employee to return amounts in excess of substantiated expenses is to have a written expense reimbursement plan (which is incorporated by reference into the worker s employment contract), which clearly so provides. Actual Return by Employees of Excess Reimbursed Amounts A plan must require the employee to pay back any reimbursements in excess of actual substantiated expenses. Both the requirement of substantiation and the requirement of return excess reimbursements must be met within a reasonable period of time. What exactly constitutes a reasonable period of time depends on all the facts-and-circumstances. Two safe harbor rules exist to establish that the reasonable period of time requirement has been met: 1. Fixed Date Method. If an advance is made within 30 days of when the anticipated expense is paid or incurred, and the expense is substantiated within 60 days after it is paid or incurred, or the excess amount, if any, is returned by the worker to the payer within 120 days after the expense is paid or incurred, the reasonable period of time requirement has been met. 2. Periodic Statement Method. If the payer provides employees with periodic statements (no less frequently than quarterly): Stating the amount, if any, paid under the arrangement in excess of the expenses the employee has substantiated; and Requesting the worker to substantiate any additional expense that have not yet been substantiated, and/or return any amounts remaining unsubstantiated within 120 days of the statement, then, any expense substantiated or any amount returned within that time period will be treated as being substantiated or returned within a reasonable period of time.

3 V. Reasonableness Requirement Where money is advanced to a worker to defray expenses, such advance must be reasonably calculated to not exceed the amount of anticipated expenditures, and must be made on a day within a reasonable period of time prior to the day that the anticipated expenditures will be paid or incurred by the worker. Different Categories of Expenses Different categories of expenses are eligible for different treatment in expense reimbursement plans, as follows: 1. Transportation expenses (local automobile expenses); 2. Away-from-home travel (meals, incidentals and lodging, or meals and incidentals only) expenses; and 3. Other expenses. The options available regarding each of the three foregoing types of expenses are set forth below. Any options for transportation expenses may be freely combined with any option for away-fromhome travel and any option for other expenses. In other words, options in each of the three main expense categories may be freely mixed and matched with the options available in each of the other categories in any desired order. Transportation Expenses Options available for the reimbursement of local transportation expenses include: 1. IRS Standard Mileage Rate. The IRS sets a standard mileage rate changes each year in an Internal Revenue Bulletin. Bulletin set the rates at 55.5 cents for business miles, 14 cents for charitable and 23 cents a mile for medical and moving. For the 2013 tax year, the standard rates will be 56.5 cents for business, 14 cents for charitable and 24 cents for medical and moving. If a worker substantiates the number of miles driven, and the business purpose for the mileage, a monetary reimbursement for each such mile at any amount of cents per mile up to, but not exceeding, the standard IRS mileage rate, will not be taxable wages to such worker. 2. Actual Cost Method. Reimbursable actual car expenses include the costs for gas, oil, repairs, maintenance, insurance, taxes, licenses, and other similar items. Interest incurred by employees on loans to purchase a car is not an employee business expense and, therefore, not reimbursable. Under the actual cost method, actual expenses such as these are totaled and multiplied by the business use percentage to determine the business expense. In additional to the above expenses, all business parking fees and tolls may also be deductible at one hundred percent if related to business use. Away-from-home travel You are allowed to use the U.S. General Services Administration (GSA) approved per-diem expenses to reimburse employees for their away from home travel expenses. These per-diem expenses are separated between meals and lodging. In addition, you can use per-diem rates specified for certain high cost locations, such as Los Angeles and New York City. If you are a business owner you can use

4 the per-diem for meals and incidental expenses but you must substantiate your lodging expenses. Other expenses Any true business expense, unless it is considered to be lavish can be deducted as long as you provide the substantiation required. The following Sample Accountable Expense Reimbursement Plan is provided for you to use to develop a plan for your specific business. Sample Accountable Expense Reimbursement Plan Be it resolved, that employees of (YOUR COMPANY NAME) be reimbursed for business expenses incurred on behalf of and authorized by (YOUR COMPANY NAME) (hereinafter referred to as authorized business expenses ) in accordance with the follow criteria: 1. Business Purpose Authorized business expenses covered by this plan must meet the requirements for deductibility as business expenses under Federal tax law. Such expenses must have been incurred by an employee in connection with the performance of services by such employee on behalf of (YOUR COMPANY NAME). 2. Adequate substantiation Any employee requesting reimbursement for authorized business expenses hereunder must furnish to (YOUR COMPANY NAME) adequate substantiation of expenses to be reimbursed. Adequate substantiation shall be accomplished by the timely submission to (YOUR COMPANY NAME) of a company expense reimbursement voucher properly completed in accordance with the substantiation requirements of Federal tax law, together with any relevant documentary evidence required under the substantiation requirements of Federal tax law. Such documentary evidence shall indicate the amount, description indicating the particular nature of the expense, time, place and business purpose or use of any authorized business expenses and any other necessary related information. 3. Return of Excess Amounts Any employee receiving payment from (YOUR COMPANY NAME) for an authorized business expense incurred by such employee on behalf of (YOUR COMPANY NAME) must return to (YOUR COMPANY NAME), within sixty (60) days after the incurrence of any such expense (or 120 days after the employer demands the report), any amount of such payment that exceeds the amount the employee has properly substantiated relating to such expense;

5 4. Request for Reimbursement Any request for reimbursement for any authorized business expense hereunder must be submitted by any employee within sixty (60 days after the incurrence of any such expenses (or 120 days after the employer demands the report) after the incurrence of such expense by such employee. Any request for reimbursement must be submitted via a properly completed and substantiated (YOUR COMPANY NAME) expense reimbursement voucher and related documentary evidence in accordance with the provision of paragraph (2) above; 5. Reimbursement of Transportation (Automobile) Expense Authorized transportation (automobile) expenses hereunder shall be reimbursed to an employee at the current Standard Mileage Rate as set forth by the Internal Revenue Service on a per cents per mile for properly substantiated mileage with an authorized company related business purpose; 6. Reimbursement of All Other Expenses All other authorized business expenses hereunder shall be reimbursed in an amount equal to the actual cost thereof incurred by an employee. 7. Advances In limited circumstances, advances of authorized business expenses to be incurred by an employee on behalf of (YOUR COMPANY NAME) may be granted by and at the sole discretion of (YOUR COMPANY NAME). The amount of money advanced by (YOUR COMPANY NAME) to an employee MUST be reasonably calculated not to exceed the amount of anticipated expenditures and made on a day within thirty (30) days of the day that the anticipated expenditures are paid or incurred. The employee receiving such advance must substantiate any related expense to (YOUR COMPANY NAME) within sixty (60) days after the incurrence of any such expense (or 120 days after the employer demands the report) and return to (YOUR COMPANY NAME) within sixty (60) days after the incurrence of any such expense (or 120 days after the employer demands the report) any advanced amount that exceeds the amount the employee properly substantiated relating to such expense. 8. Additional Rules Any reimbursement for expenses hereunder shall be payable to an employee by (YOUR COMPANY NAME) either (1) with a check separate and apart from the employee s regular paycheck, or (2) by a separate amount disclosed on the employee s regular paycheck. This plan shall be maintained on a calendar year (i.e. January 1 through December 31) basis and the method of reimbursement enumerated hereunder may not be changed by action of either (YOUR COMPANY NAME) or the employee at any time during a calendar year (i.e. once the method of reimbursement is used, it must be consistently followed for the rest of the calendar year).

6 9. Consequences of Failure Consequences of failure by an employee to comply with any provision or provisions contained in paragraphs 1 through 8 above may, at the option of (YOUR COMPANY NAME), render the expenses related to such failure not reimbursable. (YOUR COMPANY NAME) Signature of Officer Date

7 If You Have Expenses for: Travel Entertainment Then Keep Records That Show Details of the Following Elements Business Amount Time Place or Description Purpose and Relationship Cost of each Dates you left Destination or Purpose: separate expense and returned fro area of your Business purpose for travel, each trip and travel (name of for the expense lodging and number of days city, town, or or the business meals. Incidental spent on business other destination) benefit gained or expenses may be expected to be totaled in gained. reasonable categories such Relationship: as taxis, daily N/A meals for traveler etc. Cost of each separate expense. Incidental expenses such as taxis, telephones, etc., may be totaled on a daily basis. Date of entertainment (Also see Business Purpose.) Name and address or location of place of entertainment. Type of entertainment if not otherwise apparent. (Also see Business Purpose.) Gifts Cost of the gift. Date of the gift. Description of the gift. Purpose: business purpose for the expense or the business benefit gained or expected to be gained. For entertainment, the nature of the business discussion or activity. If the entertainment was directly before or after a business discussion; the date, place, nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity.

8 Gifts continued: Transportation (Car) Cost of each separate expense. For car expenses the cost of the car and any improvements, the date you started using it for business, the mileage for each business use, and the total miles for the year. Date of the expense. For car expenses, the date of the use of the car. Your business destination (name of city, town, or other designation.) Relationship: Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you. For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal. Purpose: Business purpose for the expense. Relationship: N/A Publication 463