Reimbursements for expenses like mileage can be taxable for employees depending on if your business has an accountable plan. Let's go over what an accountable plan is and the impact it can have on your business taxes.
What does an accountable plan mean?
An accountable plan is a system for handling your reimbursements or allowances for employees. It must satisfy the following requirements:
- There's a business connection
- Employees provide some form of substantiation
- Employees return excess amounts
What's an example of an accountable plan?
Let's say your employees use their personal cars for business reasons and you reimburse them for mileage. Let's look at a mileage reimbursement program that would fall under an accountable plan:
- Your business reimburses employees for miles on their car as part of business trips. For example, you reimburse salespeople for making trips to clients and potential clients.
- At the end of the week, month or quarter, you require employees to turn in an expense report documenting their mileage. Payroll verifies the report and reimburses employees.
- If there is an error and employees receive too much in reimbursement, that amount is returned in a reasonable amount of time.
What should you do with excess reimbursements?
Sometimes, businesses dole out excess reimbursements. This is more common with advances rather than expense reports. For example, your business may give a traveling employee an advance for an upcoming business trip but the trip expenses are less than the advance.
Employees must return excess reimbursements within a reasonable amount of time if you want to fall under an accountable plan.
What's a "reasonable amount" of time? The IRS defines this as:
- An advanced received within 30 days of the expense.
- Employees adequately account for expenses within 60 days after expenses paid or incurred.
- Employees return excess amounts within 120 days after expenses incurred or paid.
- Your business must give employees a statement that requests the return or accounting for outstanding advances. This must be one at least quarterly. Also, employees must comply within 120 days after receiving this statement.
Do you need an accountable plan?
Not necessarily but it's helpful for taxes. If your reimbursements are part of an accountable plan, it's not considered taxable income for employees.
Do you need to submit your accountable plan with your taxes?
No, but you must have these records available if you ever face an audit. For most businesses, it's a good idea to keep clear records. This is useful if you ever face an IRS audit but it's also useful if you ever have a financial audit or want to apply for business loans.
