This is part two of a four-part series that provides mobile workforce guidelines for contractors.
For construction companies, it is a common practice to have contractors/employees working at different job sites and locations. With that, there are many out-of-pocket business expenses that occur day-to-day. Construction companies should have a policy in place to determine how these out-of-pocket business expenses should be accounted for. An accountable plan provides the most tax savings for both the employer and the employee. In this article, we will discuss what an accountable plan is as well as three common methods that you can utilize in helping determine what works best for your business.
What is an accountable plan? It is a policy set in place that reimburses employees for business expenses that were paid for by the employee on the job. The following criteria must be met for a plan to be accountable:
- The expense must be business related
- The expense is substantiated by a receipt or any other form of information (invoice, cancelled check, etc.) that provides details of the business expense
- Any portion of expense allowance that has not been used must be returned within a reasonable amount of time
If the company’s plan is considered an accountable plan, the following occurs:
- The employer may deduct the reimbursement as a business expense
- Any meal expenses follow the 50 percent deductible limitation (see Part One – Meals and Entertainment article on changes to the meals deduction in 2021 and 2022 for potentially fully deductible expense)
- The reimbursement is not included in the employee’s income and therefore does not affect payroll
After a company solidifies an accountable plan, there are three common types to choose from. Below are the acceptable methods of an accountable plan that can help determine what is appropriate for your construction company.
- Direct Reimbursement – Under this method, the employee submits the required documentation to the employer in order to be reimbursed for the expenses incurred. The supporting documents need to be detailed and meet the criteria above for an accountable plan. In general, the construction company should have a policy in place explaining what documentation will need to be provided for reimbursement and the appropriate timeframe to provide such documentation.
- Per Diems – The company establishes a rate of reimbursement under the per diem method. The General Services Administration publishes annual rates based on localities. If the contractor decides to provide a higher rate than the federal rates, the excess reimbursement is included in the employee’s income. The expenses must meet certain criteria in addition to the accountable plan requirements above. For instance, the amount established should be for necessary and ordinary expenses reasonably anticipated to be incurred and thus not exceed these expenses.
- Company Provided Assets - If you have employees/contractors that are traveling to job sites every day, the company may decide that it is more beneficial to provide a company-owned automobile instead of reimbursing the employee for using their personal car. Under this approach, the company can deduct all expenses related to the company-provided car except for personal use of the vehicle, which will need to be included in the employee’s compensation.
A non-accountable plan is most commonly one in which the employee receives a flat amount each month and documentation is not required to be provided to the employer. The payments are 100 percent deductible for the employer and considered additional compensation for the employee (subject to withholding and FICA taxes).
Having an accountable plan in place can provide tax advantages to both your construction company and your employees. It may be worth looking into your company’s reimbursement process to ensure your policy meets the IRS requirements listed above in order to maximize your tax savings.
Stay tuned for part three in our series which will cover additional mobile workforce guidelines for contractors. If you have any questions, please contact your Kreischer Miller relationship professional or any member of our Construction Industry Group.
Authors:
Rachel DeFrain, Senior Accountant, Tax Strategies
Tiffany Eichhorn, Senior Accountant, Tax Strategies
Michelle Gray, Senior Accountant, Tax Strategies
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Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.
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