Accountable Plans enable reimbursements for home-office expenses
The days of employees deducting un-reimbursed business expenses on Form 2106 are gone as we noted in our post on the 2018 tax changes for personal deductions. If you have an Accountable Plan with your employer, you can get a tax-free reimbursement of those expenses. Employee-owners (such as S Corp owners) should also set up an accountable plan.
Definition of ‘Accountable Plan’
Investopedia defines an accountable plan as “… a plan that follows IRS regulations for reimbursing workers for business expenses in which reimbursement is not counted as income. This means that reimbursements are not subject to withholding taxes or W-2 reporting.”
Expenses Covered in an Accountable Plan
If you are an employee-owner of the company and you operate your business only from your home, you have two types of expenses direct and mixed. If you are a non-owner employee with a work-from-home office, your employer can only reimburse you for a prorated percentage of mixed expenses.
Direct expenses include expenses you incur solely because you operate your business. These expenses include direct home office expenses such as furniture, business insurance, computers, phone systems, and, office supplies. As the employee-owner, you should pay these expenses directly from your businesses accounts.
Employers with employees using a work-from-home office could elect to pay direct expenses in some circumstances. For example, the employer could purchase a laptop for the employee.
Mixed expenses include expenses you incur to operate your business and to operate your home. These expenses would include utilities (electricity, water, heating/cooling), trash services, internet fees, property taxes, and property insurance.
Note: you can only deduct a prorated percentage of the mixed expense. To determine the percentage, you would measure:
- the square footage of your dedicated office space
- the square footage of the livable area of your home.
Divide your office space by your total livable space. The result of the calculation is the percentage of space your office uses relative to your house.
You have 2,400 square feet of livable home space. That space includes a 720 sq ft dedicated office space. In this example, you have a prorated office percentage of 30% (720/2400). You would then multiply the 0.30 times all mixed expenses.
What’s in an Accountable Plan
In your Accountable Plan, you list the items covered by the plan. You start the process by identifying the relevant mixed expenses. If you need help determining the expenses to include in your plan, please contact us.
This is an ideal case for a simple spreadsheet. On that document, you would list data in the columns as follows:
- First column, each mixed-expense item
- Second column, the appropriate prorated percentage
- Third column, the amount you paid for each mixed-expense (for a month or quarter)
- Fourth column, a formula to multiple columns 2 by column 3
Finally, at the bottom of the fourth column, total the amount of the column. This is your total reimbursement amount.
Your Accountable Plan should also describe how often you must submit a reimbursement request. We recommend at least every 90 days.
Payments Under An Accountable Plan
If you are an employee-owner, you should prepare and submit a formal expense report to your company. Submit the expense reports on a regular basis as defined by your plan. Keep all related receipts and other documents (utility bills, property tax assessments, etc.)
Your company should reimburse you by writing a check to you from the company’s checking account. You will then deposit that check into your personal account. In your files, attach a copy of the check along with the expense report.
In the company’s accounting system, set up each owner-employee (for Accountable Plan expense reimbursement only) as a vendor.
You could name that account with the individual’s name and the word expenses, example: John Smith Expenses. In QuickBooks, you can tell the system to print the check as the individual’s name.
When you write the check, write it for the total amount. In the check’s detail section, assign each expense to the appropriate expense category.
If you are a non-owner employee, you will just submit the required expense report and documentation as defined in the plan from your employer.
Accountable Plans are easy to set up and a great way to pull money out of the business. As an added bonus, you can also reduce your taxes.