What you need to know about accountable and nonaccountable plans
If you have employees, you can reimburse or give them an advance or allowance for business expenses, including but not limited to ordinary and necessary transportation, business entertainment, travel, meals and lodging expenses. These types of payments can either be treated under an accountable or nonaccountable plan. Below, are the requirements for both types of plans.
Accountable Plans
An accountable plan requires your employees to comply with the following requirements:
• Pay or incur deductible expenses while performing services as your employee;
• Adequately account to you for these expenses within a reasonable period of time; and
• Return any excess reimbursement or allowance within a reasonable period of time.
You are allowed to deduct expense reimbursements to employees who properly comply with the terms of the plan as business expenses (limited to 50% for meals and entertainment). These reimbursements are excluded from the employee’s gross income, are not reported as wages or other compensation on the employee’s Form W-2, and are exempt from federal income tax withholding and employment taxes.
Amount Deductible for M&E is 50% of:
Expense
Lesser of per diem allowance or federal rate
Federal rate
40% of the per diem allowance
Reimbursement or Per Diem
Reimbursement
Per diem for meal and incidental expenses only
Per diem that covers lodging, meals and incidental expenses equal to or greater than federal rate
Per diem that covers lodging, meals and incidental expenses less than federal rate
Federal per diem rates for the continental United States are available at gsa.gov.
You can deduct 80% of the cost of reimbursed meals that your employees consume while away from their tax home on business during or incident to any period subject to the Department of Transportation’s “hours of service” limits.
The 50% deduction limit applies to reimbursements you make to your employees for expenses they incur for meals while traveling away from home on business and for entertaining business customers at your place of business, a restaurant or another location. It applies to expenses incurred at a business convention or reception, business meeting or business luncheon at a club.
The 50% limit doesn’t apply to an expense for food or beverage that is excluded from the gross income of an employee because it is a de minimis fringe benefit.
Nonaccountable Plans
A nonaccountable plan is an arrangement that doesn’t meet the requirements for an accountable plan. All amounts paid or treated as paid under a nonaccountable plan are reported as wages on Form W-2. The payments are subject to income tax withholding, social security, Medicare and federal unemployment taxes. You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees’ pay.