20.32 What Is an Accountable Plan?

A reimbursement or allowance arrangement is an accountable plan (20.31) if you must:

• Adequately account to your employer for your expenses; and
• Return to your employer any excess reimbursement or allowance that you do not show was spent for ordinary and necessary business expenses.

If these terms are met and your expenses are fully reimbursed, you do not report the expenses or the reimbursement on your return. If the reimbursement is less than your payment of expenses, you use Form 2106 and Schedule A to claim a deduction for the unreimbursed expenses. The unreimbursed expenses are subject to the 2% AGI floor on Schedule A (19.3).

What is an adequate accounting?

You adequately account to your employer by submitting receipts and an account book, diary, or similar record in which you entered each expense at or near the time you had it. You must account to your employer for all amounts received as advances, reimbursements, or allowances, including amounts charged on a company credit card. Your records and supporting information must meet IRS rules (20.28). You must also pay back reimbursements or allowances that exceed the expenses that you adequately accounted for, or the nonreturned excess will be taxable under the rules for non-accountable plans (20.35).

The accounting requirements are eased if you are reimbursed under a per diem arrangement covering meals, lodging, and incidental expenses (20.33) or you receive a flat mileage allowance (20.34).

Planning Reminder

Importance of Adequate Accounting

If you adequately report expenses to your employer and return excess reimbursements, you are treated as being reimbursed under an accountable plan and generally do not have to report any reimbursement on your return (20.32).

- - - - - - - - - -

Time limits for receiving advances, substantiating expenses, and returning excess payments.

The general rule is that these events must occur within a reasonable time. Under an IRS “safe harbor,” the following payments are considered to be within a reasonable time:

• Advance payments—if given to you within 30 days before you reasonably anticipate to pay or incur expenses;
• Substantiation of expenses—if provided to your employer within 60 days after the expense is paid or incurred; and
• Return of excess—if done within 120 days after you pay or incur expense.

An employer may set up a “periodic statement method” to meet IRS rules. Here, an employer gives each employee periodic statements (at least quarterly) that list the amounts paid in excess of expenses substantiated by the employee and request substantiation of the additional amounts paid, or a return of the excess, within 120 days of the date of the statement. Substantiation or return within the 120-day period satisfies the reasonable time test.

Filing Tip

Failure To Timely Return Excess

If you fail to return excess payments within a reasonable time but you meet all of the other tests applied to an accountable plan, such as providing proof of the expenses, only the retained excess is taxed to you as if paid outside of an accountable plan.

- - - - - - - - - -

Allocating reimbursements to meals and entertainment.

Only 50% of meals and entertainment expenses are deductible. Therefore, if you adequately account for your expenses, and receive a flat reimbursement that is partly for meals and entertainment, and partly for other expenses, you must allocate part of the reimbursement to meals and entertainment if the employer has not provided an item-by-item breakdown. You must make this allocation if you want to deduct expenses exceeding reimbursements because on Form 2106, you must separately list meals and entertainment costs and reimbursements for meals and entertainment. The Form 2106 instructions have a worksheet for allocating the reimbursement based on the percentage that your meal costs bear to the total T&E expenses.