Businesses can reimburse employees for business expenses tax-free under an accountable plan if they are correctly claimed and documented.
An Accountable Plan is a great strategy to extract money from the firm and lower the overall tax bill. Additionally, your wages may decrease if you reduce your total net business income, which also lowers one of the conditions for the reasonable compensation test. This avoids a potential cash flow issue that can impact the firm and the employee.
Which kinds of costs are covered?
An employee may have to incur expenses relating to their job responsibilities. Since the employee is unable to deduct the expenses, corporations get a tax deduction for the tax-free reimbursement of the expenses to the employees. The expenses could include:
- Mileage reimbursement
- Use of home office
- Office Supplies
- Desks, Chairs, and other office equipment
- Training costs
- Business Cards
- Food expenses related to business meetings
For a tax-free reimbursement, all expenses must be directly related to the business and fall under the employee’s assigned obligations.