What is an Accountable Plan?

An accountable plan is a mechanism for reimbursing employees who incur work-related expenses. If the plan is administered properly, it is handled in a special way for taxes. For employers and employees alike, there are distinct advantages to setting up reimbursements under an accountable plan. It is important to be aware, however, that the expenses claimed under the plan are subject to scrutiny, as tax authorities are wary about business expenses used for tax deductions.

Under an accountable plan, when employees spend money on work-related supplies and activities and the employer compensates them, the money is not considered part of the employee's income, and the employee does not pay taxes on it. The employer treats the expenses as a tax deduction. For both parties, this arrangement can be very beneficial. Without an accountable plan, the employer would have to treat reimbursements as wages for tax purposes, and the employee would need to pay taxes on them.

Three characteristics must be present for something to be an accountable plan. The first is that employees must be reimbursed for expenses that are allowable. Paying for a hotel room while at a conference would be an example of a legitimate business expense. Buying tickets to a play while at the conference, however, would not count under the accountable plan unless attending the play was required for a work reason.

There must also be a method for logging and reporting expenses under the accountable plan. This includes submitting receipts and carefully documented expense statements, logging mileage, producing credit card statements to demonstrate which credit card was used to pay for an expense, and so forth. Finally, if employers are provided with excess reimbursements, as for example if an employee is given cash ahead of time for a trip, the extra money must be returned in a timely fashion. The documentation kept by the employee should demonstrate that funds were leftover.

Essentially, the out-of-pocket expense plan follows the same rules people have to follow when taking deductions for expenses they personally incur. The expenses must be legitimate and documented, with a clear trail of information showing where, when, how, and why money was spent. Tax authorities can opt to audit this information and they may decide that some of the claimed expenses are not legitimate and should not have been classified under the accountable plan. People can avoid paperwork problems and reduce the risk of audits by consulting an accountant to find out more about allowable expenses.