Accountants are often called upon to sort out matters that easily confuse business owners. One particularly important issue affecting both income tax calculations and accounting procedures is the subject of “accountable plans.” Several factors accountants learn from CPA exam review are applicable to these business arrangements for reimbursing employees.
Adding to the body of knowledge relied upon to improve compliance with accountable plan requirements is a recent revenue ruling by the IRS. Four detailed examples in the ruling read like sample CPA exam questions, which are therefore helpful in educating accountants. Reimbursements by employers must meet accountable plan rules for the businesses to avoid complications.
When workers meet accountable plan provisions, the amounts they receive are tax-exempt reimbursements. As such, the company employer has no concerns with payroll taxes. Conversely, when reimbursement arrangements don’t follow accountable plan guidelines, employers must add the paid amounts to a worker’s taxable wages. This triggers income tax for the employee plus remitting of payroll taxes by the company. Desire to avoid this costly condition for both worker and employer draws requests for accountant expertise from courses for CPA study.
Properly structuring company reimbursement arrangements according to accountable plan mandates averts the extra tax burden. The requirements are fairly simple steps, which are identified in CPA study materials. Qualifying for an accountable plan first necessitates that the expenses paid by employees have a business connection. Secondly, employees must adequately account for the expense amounts within a reasonable time. Lastly, employees must return within a reasonable time any advance allowances exceeding eventually paid expenses. Well-informed accountants understand that reasonable time to account for expenses is 60 days after they are paid and 120 days is reasonable for returning excess amounts.
The trouble for some businesses is that they fail to adhere to these standards despite having property set up accountable plans. For example, the business connection requirement means that the expenses paid by a worker must arise relative to the employer’s specific business purpose. This is where the IRS revenue ruling delivers some guidance.
One of the IRS examples conveys that a company broadly reimbursing workers for providing their own job tools does not meet accountable plan rules. Reimbursements must correspond with specific tools according to employee purchase records. A similar example illustrating failure to meet accountable plan rules is a company that reimburses employee mileage at a flat rate without regard to actual miles driven by each employee. Another ineligible arrangement under accountable plan standards is an employer that pays workers a per diem travel reimbursement regardless of whether travel expenses were incurred to work at distant locations.
One IRS example that does meet accountable plan rules is a company that obtains exact expense records from employees and reimburses those related to completion of tasks for the company. The IRS is obviously focused on assuring that employees recover funds for only expenses that they document were spent on business items. This scrutiny should inspire accountants to apply understanding from a CPA review course about recording financial transactions with audit trail substantiation. A company following this process for employee-paid expenses is assured of tax-free reimbursements to the workers.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
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