What is the difference between accountable and nonaccountable plans

The business use of the vehicle is a deductible or reimbursable expense. Under the TCJA, the reimbursement of an expense does not change the deductibility of the expense itself. One such expense, Entertainment, is now no longer deductible under the new tax law. If an employer were to reimburse an employee for Entertainment expenses, then the reimbursement would need to be included as wages to that employee.

Adequate accounting — Employees must make an adequate accounting within a reasonable period of time. What constitutes an "adequate accounting"? Employees must show that they spent the money for legitimate business reasons. Third-party evidence, such as receipts will normally suffice. If not evident on the face of the document, the employee should record business purpose, reason for the expenditure, the date, the location, and other parties involved, such as when providing meals or entertainment.

Reimbursement may not exceed the IRS rate for business travel. Parking and tolls are additional deductions since they are not included in the standard mileage rate. What is a "reasonable period of time"? The IRS states that it is a facts-and-circumstances situation. However, it has guidelines that specify what constitutes a reasonable period of time.

If the employee received an advance, it must have been given within 30 days of the travel date. The expense must be substantiated within 60 days after the expense is paid.

Excess reimbursement — Any excess reimbursement must be returned within days of receipt of a statement from the employer that lists outstanding advances. These are IRS guidelines, and a company is free to implement more restrictive rules. For example, an employee who is reimbursed under an accountable plan, but fails to return, within a reasonable time, excess reimbursements. In this example, the excess reimbursements would be treated as if paid under a nonaccountable plan.

In addition, if an employee is repaid for business expenses by reducing the amount reported as wages, it will be considered a nonaccountable plan. The IRS states that a reasonable period of time depends on the facts and circumstances of each situation. However, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time:.

The second requirement for an accountable plan says that the employee must adequately account to the employer for expenses. Examples of adequate accounting by the employee include providing the employer a statement of expense, account book, diary, or similar record in which the expense is entered at or near the time it was paid. The employee also must provide documentary evidence, like receipts, of travel, mileage, and other business expenses. List of Partners vendors. The TaxCuts and Jobs Act TCJA of eliminated itemized deductions for employees who incur unreimbursed expenses for company business for through Companies can compensate for their employees' loss of this deduction by setting up a non-accountable plan, which is a way to provide employees with an allowance for business expenses or travel that does not need to be justified to an employer.

Money provided to employees in a non-accountable plan is considered taxable income and should appear on an employee's W Also known as an allowance plan, non-accountable plans differ from accountable plans in that the latter requires employees to provide adequate accounting to receive reimbursement.

Since money received by employees under an accountable plan is for reimbursement of money spent on business-related expenses it is not taxable. While money given to employees under a non-accountable plan is meant to be spent on business expenses, such as travel, meals or entertainment, the recipient may spend it any way they choose.

As far as the Internal Revenue Service IRS is concerned, however, it is compensation that is paid in addition to salary or wages. As such, it is taxed as income. Employers may use a non-accountable plan for some expense items and an accountable plan for other expenses. Any outlay on business-related expenses in a non-accountable plan may be claimed as a miscellaneous itemized deduction by the recipient on their Form.

As per IRS rules, expenses must be both ordinary and necessary to be deductible; otherwise, the IRS may deny them or consider them "lavish" and also not allow them, though this is rarely applied. In the context of non-accountable plans, "ordinary and necessary" has a more lax definition depending on the context. In an accountable plan, the employee must substantiate what the expense was and what it was for, how much it was, and that it was incurred while doing business for the company.

Accountable plan expenses are not considered taxable income. Any advances not used must be returned to the company in a timely fashion as specified by the IRS. These wages are considered supplemental wages and subject to income, social security, Medicare, and FUTA taxes. The IRS says payments are considered Non-Accountable payments if any of the following conditions are met:. Non-Accountable plans are the simplest for the company to track.

They are put in box 1 of the W-2 and are considered as normal wages.