Maximizing Tax Benefits: Understanding Accountable Plans for Employers and Employees
Navigating the complexities of tax laws can be a daunting task, especially when it comes to often-overlooked strategies like Accountable Plans. When properly implemented, these plans offer substantial tax advantages for both employers and employees.
In this article, we'll delve into the intricacies of Accountable Plans and how they can be a win-win solution.
The Impact of TCJA on Employee Business Expenses: Since the enactment of the Tax Cuts and Jobs Act (TCJA) in 2017, there have been significant changes to the rules governing the deduction of employee business expenses. Previously, employees could potentially deduct these expenses on their personal tax returns. However, for the years 2018 through 2025, TCJA suspended this deduction, affecting expenses like local business transportation and away-from-home travel.
The Role of Accountable Plans: Accountable Plans offer a strategic workaround to the TCJA deduction limitations. These plans, meeting IRS criteria, enable employers to reimburse employees for business-related expenses without incurring taxable income. The benefits extend to both parties involved.
Benefits for Employers:
Payroll Tax Savings: Reimbursements under an Accountable Plan are exempt from payroll taxes, resulting in significant FICA tax savings for employers.
Deductible Business Expenses: These reimbursements can be claimed as deductible business expenses, further reducing the company's taxable income.
Benefits for Employees:
Non-Taxable Reimbursements: Reimbursements under an Accountable Plan do not count as taxable income for employees, eliminating the need to report them on their tax returns.
FICA Tax Exemption: There's no FICA tax withholding on the reimbursement, leading to substantial tax savings, especially for those incurring frequent business-related expenses.
IRS Criteria for Accountable Plans: To qualify for these benefits, an Accountable Plan must meet three IRS-defined criteria:
Business Connection: Expenses must be incurred while performing services as an employee.
Substantiation: Detailed records and receipts of expenses must be provided to the employer within a reasonable timeframe.
Returning Excess Amounts: Any excess reimbursement must be returned within a reasonable period.
Customizing Your Accountable Plan: Creating an effective Accountable Plan requires a deep understanding of IRS regulations. It's crucial to ensure full compliance to avoid potential tax penalties. A comprehensive plan should include specifics like expense types, supervisory approval, cost limits, submission procedures, required documentation, and more.
Accountable Plans offer a mutually beneficial tax strategy for both employers and employees. They provide a means for reimbursing business-related expenses without incurring additional tax liability. However, customization and compliance are key. For personalized advice and assistance in setting up your Accountable Plan, please contact our office.