What Is an Accountable Plan Under Revenue Ruling 79-54?
Understand the IRS framework for employee expense reimbursements and how proper documentation can prevent these payments from being treated as taxable income.
Employers often reimburse staff for business-related costs, such as work travel, client meals, or company supplies. How these reimbursements are handled has tax implications for both the company and the employee. This framework determines if the money is treated as a non-taxable business expense or as additional wages.
Defining an Accountable Plan
An accountable plan is an employer’s reimbursement arrangement that meets specific Internal Revenue Service (IRS) requirements under Internal Revenue Code Section 62. For a plan to be accountable, it must satisfy three conditions. First, any reimbursed expense must have a clear business connection and be incurred in the course of performing services for the employer.
The second condition is that the employee must adequately account for the expenses to the employer within a reasonable period. This process is known as substantiation. Finally, the employee is required to return any reimbursement or allowance that exceeds the substantiated expenses, also within a reasonable timeframe.
Substantiation Requirements for Employees
To meet the “adequate accounting” rule, an employee must provide detailed records to substantiate each expense. The necessary information includes:
- The amount of the expense
- The date and time it was incurred
- The location or place of the expense
- The specific business purpose of the cost
For example, a receipt for a client dinner should be accompanied by a note explaining who attended and what business was discussed. For lodging, travel, and meals, itemized receipts are standard. Vehicle expenses require a mileage log showing the dates, destinations, business purpose, and odometer readings for each trip. The IRS defines a “reasonable period” as substantiating an expense within 60 days and returning any excess reimbursement within 120 days.
Tax Reporting Implications
The tax treatment of reimbursements depends on whether they are paid under an accountable plan. If a plan is accountable, reimbursements are not included in the employee’s gross income and have no impact on their tax return.
In contrast, a plan becomes non-accountable if it fails to meet any of the three required conditions, such as not requiring substantiation. Under these arrangements, all reimbursements are considered taxable wages and must be included in the employee’s income on their Form W-2. Following the Tax Cuts and Jobs Act of 2017, the deduction for unreimbursed employee expenses is suspended through 2025.