If one of your nonprofit’s employees submits an expense report, your nonprofit can’t reimburse him or her tax-free — unless you have an accountable plan. With this accounting procedure in place, your organization won’t have to report reimbursed expenses as earnings, and your staffers won’t owe taxes on them.
Savings for staffers can quickly add up. Since the passage of the Tax Cuts and Jobs Act of 2017, employees have been unable to deduct work-related expenses on their income tax returns, with limited exceptions. By contrast, an accountable plan generally reimburses expenses at 100%.
Formalize your plan
If you’d like to offer an accountable plan to staffers, you must formally establish it. The plan doesn’t have to be in writing, but a written plan looks more professional and makes it easier for your organization to respond to possible IRS inquiries and challenges.
A written plan lets you describe in detail the expenses your nonprofit will reimburse. Generally, expenses that could otherwise qualify as business deductions for employees should be eligible as tax-free reimbursements under an accountable plan. IRS regulations stipulate that expenses covered in an accountable plan:
· Have a “business” connection,
· Are necessary,
· Are reported by employees to their employer promptly, and
· Aren’t reimbursed for more than the amount an employee incurred.
For many nonprofits, determining what’s reasonably reimbursable is challenging. It might be helpful to consider what you’d expect another nonprofit with a similar mission and budget to spend. If an employee is reimbursed for more than the actual incurred expenses, the employee must return the excess within a reasonable period. This is also applicable to monthly allowances provided to employees, such as cell phone reimbursement. Any excess payments are considered taxable wages.
Establish procedures
Your accountable plan should follow specific procedures to remain in the IRS’s good graces. For every reimbursement, you must maintain records that include the amount and date of the expense, travel, meal, or transportation location. Expense reporting software can make reporting and recordkeeping easier. You can also require staffers to submit paper forms and copies of receipts or credit card statements for all expenses or those over a specified amount. Implement fraud-prevention controls, such as having supervisors approve expense reports. You should also devise an approval process for your chief executive’s expense reports.
Consider using per diems
A per diem plan can help simplify reimbursements and reduce paperwork. It provides fixed daily rates for meals, lodging, and other travel expenses when employees are away on business.
When you pay a per diem for lodging, meals and incidental expenses, the payment is treated by the IRS as if it were made under an accountable plan. As a result, reimbursements aren’t reported as wages or other compensation. Per diems aren’t subject to employment tax withholding and payment (though the excess of your per diem amount over the federal allowable rate is taxable income for the employee if not returned). And as long as the employee provides time, place and business purpose substantiation within 60 days, no receipts are required.
Identify payments
When administering an accountable plan, identify the reimbursement or expense payment and keep it separate from wages. You’ll be reimbursing expenses in addition to an employee’s regular compensation. Even smaller, less formal nonprofits can’t get away with substituting tax-free reimbursements for compensation employees would otherwise receive.
Sometimes it becomes necessary to advance funds to an employee when a vendor or service provider requires payment upon receipt, but the specific amount is unknown. Make sure the employee returns any excess amount to your organization. Otherwise, it’ll be considered reimbursement under a nonaccountable plan and be taxable to the employee.
Don’t let good intentions backfire
Although an accountable plan can be attractive to your nonprofit’s employee benefits package, be careful that your good intentions don’t backfire. Your plan must meet standards regarding reasonableness, documentation and other stipulations. Otherwise, your employees may receive unexpected tax bills. Talk to your Hood & Strong advisors to see if this accounting procedure makes sense for your organization.
