An Accountable Expense Reimbursement Plan is required by the IRS to reimburse employees (including you as an employee of the company) for business related expenses. If the company ever reimburses employees (including you) for mileage, meals, entertainment, travel expenses, random supplies you put on your credit card, stuff you pay cash for and so on… you must have an expense reimbursement plan in place. If you don’t, reimbursements can be reclassified by the IRS as wages and therefore subject to income tax, social security and medicare taxes.
The IRS is getting much more aggressive about policing small business owners and requiring us to maintain our records to the letter of the law. Their use of technology has improved and the government needs the money. To avoid being overtaxed, it is important to follow the rules. It is easy to maintain an accountable plan and you will probably find overlooked deductions along the way.
What is a Qualified Expense Reimbursement Plan as required by the IRS?
It is a written and signed document and requires that all reimbursed expenses:
1. be legitimate business expenses
2. be adequately accounted to the company within a reasonable period of time and
3. any excess reimbursement be returned to the company in a reasonable period of time
So, the reimbursement related to the use of your personal vehicle must be for mileage that is business related, not for gas or car payment. A mileage log needs to be provided. The meals and entertainment must be accounted for in logs and receipts provided. Travel logs must be completed and receipts attached. All requests for reimbursement need to be made on an Expense Report form.
How do you obtain a Qualified Plan? A 2011 Qualified Expense Reimbursement Plan document is in Section Ten of the 2011 Tax and Financial Record Keeping Book published by THE WILDER GROUP. All you need to do is write the name of your company where indicated and sign and date at the bottom. Excellent, you now have a 2011 Qualified Expense Reimbursement Plan in place!
How do you use a Qualified Plan? Use the 2011 Expense Report to itemize the expenses and attach receipts. The company will issue you a check on a monthly (or other regular) basis.
What if you don’t? You will lose and the IRS will win. The IRS is looking for another $300,000,000,000 to $400,000,000,000 in taxes they believe they are entitled due to misreporting.
What next? In the coming weeks I will outline strategies to help you play the game and win. Winning is better. Let them look someplace else.