By: Kathleen Bowlby
In the world of business expenses and tax regulations, accountability is key. An accountable plan is a vital tool that allows employers to reimburse their employees for business-related expenses while ensuring compliance with tax laws. In this blog post, we will delve into the significance of accountable plans, especially for S Corporation owners, and outline the essential criteria to maintain the associated tax benefits.
What is an Accountable Plan? An accountable plan is an expense reimbursement arrangement that demands a certain level of employee responsibility. It requires employees to document their business expenses and return any excess funds received that cannot be substantiated. This framework safeguards against tax complications and ensures that legitimate business expenses are appropriately reimbursed.
Recent Tax Court Ruling A recent tax court ruling is a stark reminder of the importance of a well-structured, accountable plan. In this case, a married couple with a wholly owned S Corporation failed to demonstrate the existence of an accountable plan. Consequently, all substantiated expenses incurred by the taxpayers were considered unreimbursed employee expenses. This situation was exacerbated by the Tax Cuts and Jobs Act of 2017, which disallowed the deduction of out-of-pocket expenses on personal tax returns. As a result, the taxpayers found themselves owing additional money to the IRS. To avoid a similar predicament, proactive steps are essential for businesses.
Why S Corporation Owners Need an Accountable Plan For S Corporation owners, establishing an accountable plan is even more critical. This is because S Corporation owners are considered employees of their businesses. To maintain the tax advantages associated with accountable plans, three specific criteria must be met:
- Business Connection: The reimbursed expenses must have a clear business connection. They should be directly related to the operation of the business.
- Substantiation: Expenses must be substantiated within a reasonable period. Proper documentation is essential to validate the legitimacy of the expenses.
- Excess Funds Return: Any surplus money employees receive must be returned to the employer within a reasonable period. This ensures that only valid expenses are reimbursed.
Failure to meet these criteria can lead to the reimbursement arrangement being treated as a nonaccountable plan. Nonaccountable plans, in turn, result in any reimbursement becoming taxable income for the employee.
Stay Compliant and Seek Guidance As the IRS continues to strengthen its oversight, maintaining compliance with tax regulations is paramount for businesses. Setting up an accountable plan is a proactive step that protects your employees and ensures that your business remains in good standing with tax authorities. If you’re unsure how to establish an accountable plan or need assistance navigating the complexities of tax compliance, don’t hesitate to reach out to us. The Reynolds + Rowella advisors are here to help you set up a robust, accountable plan that safeguards your business and finances. Remember, accountability pays off in the world of taxes in the long run.
Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve. Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.