If you’re a small business owner trying to minimize your tax liability, you shouldn’t overlook the power of accountable plans. Implementing an accountable plan can save both your business and employees money on payroll taxes.
Understanding the basics of an accountable plan, its importance, general setup, and maintenance requirements can give you the information needed to save your business money this year.
What is an Accountable Plan?
An accountable plan allows you to be reimbursed, tax-free, for business expenses paid out of your personal accounts. For example, paying for a client’s lunch on your personal card or putting gas into a company vehicle using your own money. To be considered a qualifying accountable plan expense, the following three criteria must be met:
- The expense must be related to the business.
- The expense must be submitted within a reasonable period.
- The employee must return overpayments for accountable plan reimbursements.
If any of these three conditions aren’t met, the expense doesn’t qualify for the tax-advantaged treatment, which is why timely bookkeeping for Shopify businesses is so important. If the bookkeeping for Amazon businesses isn’t completed timely, you can miss the “reasonable period” test.
Why is an Accountable Plan Important?
Accountable plans are essential to receive tax-free withdrawals from your business accounts. Let’s say that you pay $5,000 out of pocket for business expenses. Here’s how the treatment of these expenses would differ with an accountable plan versus without an accountable plan:
- With an Accountable Plan – Your business gets the $5,000 deduction and you receive a $5,000 tax-free reimbursement from the company.
- Without an Accountable Plan – Your business gets the $5,000 deduction but is required to pay payroll taxes on the amount reimbursed. In addition, you will no longer get the full $5,000 reimbursement, as payroll and income taxes are withheld.
If you have a specific accountable plan question, it’s best to contact a CPA for Amazon sellers to go over the details.
How Do You Set Up an Accountable Plan?
Setting up an accountable plan doesn’t require hours of work. In fact, with the right Shopify and Amazon accounting services, you can have your plan up and running in a few days. Here are the steps you can expect:
- Create a Written Policy – The IRS is more likely to agree with your accountable plan reimbursements if you have a written policy. Include the acceptable reimbursement timeframe and the reimbursement method. Working with a Shopify accountant can help you figure out the fine details of your plan.
- Understand Expenses – The expenses must be ordinary and necessary for your business. This might include home office expenses, travel, subscriptions, licenses, and meals. Be specific about which expenses qualify.
- Document Reimbursements – The amounts reimbursed should be separately tracked from business expenses. This might include having a separate line on your employees’ paystubs and tracking them differently in your e-commerce software. When your employees submit a reimbursement request, you should always ask for a receipt to substantiate the expense in the case of an IRS audit. There are apps that can help with this.
- Submit Expenses – Be sure you submit expenses within a reasonable timeframe, which is usually within 60 days. This is where bookkeeping for Shopify businesses is important. If it takes your business weeks to get to reimbursements, you can miss the deadline.
How Do You Maintain an Accountable Plan?
Accountable plan maintenance is essential to stay in compliance with IRS regulations. As your business begins to grow, it’s not uncommon to have new reimbursable expenses. Your written accountable plan should reflect these changes.
Proper maintenance of an accountable plan also requires regular bookkeeping and accounting controls. If you are struggling to keep up with your bookkeeping workload, reach out to a Shopify accountant. A Shopify CPA can not only ensure the expense meets the accountable plan criteria but can also help you stay on top of your business’s finances.
Summary
Can your business leverage an accountable plan? If so, it’s important that you implement the proper controls to maintain your accountable plan. The good news is that you don’t have to keep up with accountable plan changes and reimbursements on your own.
Our team of Amazon FBA CPAs and Shopify CPAs can take this burden off your plate, allowing you to focus on other important areas of your business. Reach out today to set up a consultation and start taking advantage of the power of accountable plans.
