Most companies have expense accounts for the business owners and employees. But what many people don't realize is that there is a big difference between an accountable expense plan and a non-accountable one, when it comes to taxes.
Accountable and Non-Accountable Expense Plans-What's the Difference?
If your client's company has what the IRS considers an accountable expense plan, everyone benefits from tax treatment. The business gets a full deduction, (50% for dining and entertainment) and the employee does not have to report any taxable income.
On the other hand, a non-accountable expense plan may look much more enticing to companies that spend a lot on entertainment and dining, since they get 100% deduction, but the trick is the company will have to pay the employees' portion of payroll taxes on the expense money, and the employee will have to report expense payments as wages.
How to Make Sure Clients Use Accountable Expense Plans
By following these simple rules, clients can make sure their expense plans are accountable and will receive favorable treatment at tax time:
- Make sure all expense outlay is for strictly business purposes.
- All expenses should be verifiable. Anyone with an expense account needs to keep receipts. To avoid having to deal with tons of receipts, the company can give employees a predetermined allowance for travel, mileage, and other per diem expenses. Employers should check the current allowable per diem rates from the IRS.
- Refunds-Employees should return any advanced expense money that was not used for business purposes.
- Validation-IRS publications suggest that all expense payments to employees and refunds from employees should be substantiated, 60 days for expenses and 120 days for refunds.
To further help your clients make sure the expense plan they are using is of the accountable type, this free PDF, Accountable vs. Non-Accountable Plans, from the IRS lays out the specifications in easy to understand wording.
For a full explanation from the IRS about expense accounts in general, Publication 463 covers every aspect of expense payouts, reporting, accountable and non-accountable plans, reimbursements, you name it, it is covered.
Your clients will thank you for helping them make sure they are using the most favorable expense plans for their employees when tax time rolls around. One more service you provide that makes your accounting business successful.