The Internal Revenue Service (IRS) defines the requirements of an accountable plan as follows:

• The expense must have a business connection
• The employee must adequately account for expenses
• The employee must return excess reimbursement within a reasonable period of time

The definition of a “business connection” is that the expense is allowable as a deduction and paid or incurred by the employee while performing services as an employee. Regarding the employee’s responsibility to account for expenses and returns of excess reimbursements the IRS provides several safe harbors.  The substantiation of an expense within 60 days after it is paid or incurred will be deemed reasonable, as will the return of an advance within 120 days. As an alternative the employer may provide its employees with quarterly statements that require them to either account for or return any advances within 120 days of the statement. Additional rules apply to per diem and mileage reimbursements.

Following the IRS requirements for an accountable plan will prevent tax consequences for both the business and their employees.  If you would like us to review your reimbursement plan, please contact your Dopkins Tax Advisor.