Like most physician and dental practices, yours more than likely has established certain policies and procedures for handling employee expenses. The question is: Does your approach to reimbursing staff expenses qualify as an “accountable plan” in the eyes of the IRS?
Making the Choice
If you have an accountable plan in place, expense reimbursements and allowances (per diem) will not be included on your employees’ W-2s, and they will not be subject to withholding and employment taxes. Moreover, they are considered deductible expenses for the employer.
On the other hand, if you do not have an established accountable plan, reimbursed amounts and expense allowances must be included in your employees’ gross incomes, and the amounts are subject to withholding and employment taxes.
As you can see, there are distinct tax advantages to having an accountable plan. But it is still a decision every practice must make for itself.
According to the IRS, a “deductible business expense must be both ordinary and necessary in relation to the taxpayer’s industry.” It distinguishes a business expense as “… ordinary if it’s customary or usual in the day-to-day operations of the practice or reasonably related to the taxpayer’s trade or business, while a necessary expense is one that’s appropriate and helpful in developing and maintaining the taxpayer’s business.”
There are many types of business expenses that are considered reimbursable. For example, in 2013, employees are entitled to claim round trip mileage at 56.5 cents per mile driven for business purposes. However, mileage to and from home is not reimbursable.
If your practice has multiple offices, consider setting fixed interoffice round trip rates for your employees when they travel between locations. Doing so will help eliminate guesswork on total miles driven. Employees should substantiate the destination and reason for mileage claimed on their expense reports.
Continuing medical education (CME) expenses are another reimbursable item. These costs should be preapproved by a supervisor or office manager, and the employee should include in the authorization request the cost of the seminar, travel and lodging. Set a reasonable maximum dollar reimbursement limit per CME occurrence.
A per diem allowance is a fixed amount of daily reimbursement given to an employee for lodging, meals and incidental expenses. This can be used when your employee travels for business or attends seminars. Another example is a car allowance which is paid to an employee for the business use of their car.
Whether using reimbursement or allowance, either method is acceptable as long as it is outlined in a policy and includes the documentation that should be maintained. Naturally, you cannot reimburse expenses that are primarily personal in nature. Examples would include country club dues and personal travel portions of business trips.
For a reimbursement or allowance arrangement to qualify as being accountable, each employee must make a complete accounting of his or her business expenses under certain IRS requirements. First, as noted above, the expense must be incurred because of a business connection. Moreover, documentation must be provided for the:
- Amount spent;
- Date and place of the expense;
- Business purpose; and
- Business relationship, if another person is involved.
Bear in mind that the employee must return any sums that were advanced in excess of expenses.
Minding the Details
Make sure your policy outlines what is required for substantiating business expenses. And do not make a practice of reimbursing employees without adequate documentation; otherwise, you could jeopardize your ability to deduct these business expenses.
In addition, ensure your policy includes a deadline for turning in all receipts and documentation. A monthly deadline for submitting reimbursement forms and receipts will help your practice keep accurate documentation and accounting of its expenses.
Finally, include an authorization requirement in your reimbursement policy mandating that employees who incur expenses above a preset limit must have signed authorization from a supervisor or office manager before incurring the expense.
Simplifying and Saving
Following an accountable plan for reimbursing expenses is a good way to simplify your employees’ tax liability and save a few tax dollars for yourself. You and your staff will, however, have to spend more time on documentation and plan administration.
If you have additional questions about whether an accountable plan is right for your practice, you need assistance setting up and maintaining your plan, or would simply like to review your existing plan, contact D’Ann Meisenheimer at [email protected] or 312.670.7444.