Accountable Expense Reimbursement Plan: IRS Rules, Benefits, and How to Set One Up

How to establish an expense reimbursement process

A well-designed plan should balance adequate accounting with operational efficiency. In other words, you want to ensure your business maintains an accountable plan status while minimizing the administrative burden.

While specifics will vary, here's a comprehensive framework for establishing a compliant and effective expense reimbursement plan.

1. Define eligible and ineligible expenses

Start by creating a list of expenses your business will reimburse and clearly distinguish between eligible business expenses and personal costs that won't be covered. Eligible business-related expenses typically include the following:

• Travel costs
• Meals during business trips
• Office supplies
• Professional development
• Client entertainment
• Equipment necessary for work duties

Document specific guidelines for mixed-use expenses and outline clear methods for calculating the business portion of these expenses, such as mileage logs for vehicles or percentage-based allocations for phone bills.

2. Set up approval and documentation workflows

Establish clear approval hierarchies to help ensure appropriate oversight while maintaining efficiency. For example, direct supervisors often approve routine expenses, while department heads or executives approve larger amounts or unusual expenses. Define specific dollar thresholds for different approval levels and ensure approvers understand how to adequately account for compliance with company policies.

Create standardized expense report forms that capture all the necessary requirements for IRS compliance. Typically, this should include the following information:

• The date of each expense
• Vendor name
• Amount paid
• Business purpose
• Appropriate account coding

While not strictly required for tax purposes, including totals for each expense category can make tracking and analysis much easier.

Implement reasonable timeframes for expense submission and approval. Require employees to submit expense reports within 60 days of incurring expenses to automatically meet IRS timeliness requirements. Establish approval timeframes that ensure employees receive reimbursements promptly, typically within 30 days of submission.

3. Implement internal controls and record keeping

Developing internal controls will help to prevent fraud while ensuring compliance with IRS requirements. Request original receipts for all expenses over $75, and consider requiring receipts for smaller amounts as a best practice.

A secure record-keeping system will help you maintain expense records for the required retention period. Generally, the IRS requires businesses to keep expense records for at least four years. Consider digital storage solutions that provide easy access while maintaining security and backup capabilities.

Create regular review processes that evaluate policy effectiveness and identify areas for improvement. Monthly or quarterly reviews of expense patterns can reveal trends, identify potential compliance issues, and highlight opportunities to streamline processes.

4. Leverage technology for efficiency

Expense management software can help you automate routine tasks and improve accuracy. Modern expense management platforms can capture receipt images, automatically extract key information, integrate with accounting systems, and provide real-time approval workflows. These tools reduce administrative burden while improving compliance and providing visibility into expense patterns.

Consider mobile applications that allow employees to submit expenses immediately after incurring them. Real-time submission reduces the risk of lost receipts and helps ensure timely documentation that meets IRS requirements. Many platforms also provide GPS tracking and automatic mileage calculation for vehicle expenses.

Integrate your expense management system with your accounting software to eliminate duplicate data entry and reduce errors. Automated integration ensures expense data flows seamlessly into your financial records while maintaining proper account coding and reporting.

Maintaining compliance

As tax regulations evolve and business needs change, your expense reimbursement policies should adapt to meet them. Ongoing compliance requires regular attention to policy updates, employee training, and system monitoring.

• Policy review and updates. The IRS occasionally updates guidance on accountable plans. Schedule annual reviews of your expense reimbursement policies to ensure they remain current with tax law changes and business needs.
• Employee and manager training. Provide comprehensive training for both employees and managers on expense reimbursement policies and procedures. Offer regular refresher training, especially when policies change or new employees join the company.
• Fraud prevention best practices. Implement controls to detect and prevent fraud, such as duplicate receipts, altered documentation, or excessive entertainment expenses. Audits and management oversight help identify these issues early.

How to conduct an expense reimbursement audit

A systematic audit approach protects your accountable plan status and provides valuable insights into the effectiveness of your policy. While steps can vary, here's a general progression.

1. Prepare documentation. Gather relevant documentation—such as expense reports, receipts, approval records, and policy documents. Organize documentation by employee and expense type to facilitate systematic review. Verify that your record-keeping systems provide complete audit trails for all transactions.
2. Review policy compliance. Examine each expense report for compliance with your established policies and IRS requirements. Check that submission and approval timeframes meet your policy requirements and IRS guidelines.
3. Report findings and next steps. Document your audit findings, including both compliance successes and areas needing improvement. Then, create action plans to address identified issues, including policy updates, additional training, or process improvements.

Share audit results with relevant stakeholders, including management, accounting staff, and department heads. Use audit findings to refine your expense reimbursement policies and procedures, ensuring continuous improvement in compliance and efficiency.

Expense reimbursement examples

Real-world examples help illustrate how accountable plan requirements apply in practice.

Typical example: Traveling for work

A sales representative travels to client meetings and incurs various expenses during the trip. Under an accountable plan, the representative would submit an expense report within 60 days, including receipts for hotel, meals, and transportation costs, along with documentation of the business purpose for each expense.

Mixed-use expense example: Mixing work and leisure

An employee uses their personal vehicle for both business and personal travel. The accountable plan would reimburse only the business mileage, calculated using a detailed mileage log that documents business trips separately from personal use. They maintain records showing dates, destinations, business purposes, and miles driven for business purposes.

A policy clause example

"The Company will reimburse employees for reasonable business expenses incurred in the performance of their duties, provided that employees submit complete expense reports with supporting documentation within 60 days of incurring the expense. All reimbursements are subject to manager approval and must include receipts. Employees must return any excess reimbursements within 120 days if they cannot provide adequate substantiation."

Expense reimbursement FAQs

What expenses qualify for reimbursement under an accountable plan?

Accountable plans can reimburse any ordinary and necessary business expense that would be deductible on your company's tax return, such as the following:

• Travel costs
• Meals during business trips
• Office supplies
• Professional development
• Client entertainment, and
• Equipment necessary for work duties

What documentation do employees need to provide for expense reimbursement?

The IRS requires adequate substantiation for all reimbursed expenses. Generally, this means employees must include the following information in their expense reports:

• The date
• Amount
• Business purpose
• Vendor for each expense
• Receipts or other supporting documentation
• Mileage logs for vehicle expenses

How should businesses handle late expense submissions?

Expenses submitted more than 60 days after being incurred may not qualify for accountable plan treatment, potentially making them taxable to the employee. However, the IRS considers individual facts and circumstances when determining reasonableness.

Businesses should establish clear policies requiring timely submission while allowing for reasonable exceptions in unusual circumstances. Late submissions should be carefully reviewed to ensure they still meet accountable plan requirements.

Are expense reimbursements taxable to employees?

Under an accountable plan, qualified expense reimbursements are not taxable to employees and don't generate payroll tax liability for employers. However, reimbursements under nonaccountable plans are considered taxable income subject to income tax withholding and payroll taxes.

How can LegalZoom help with expense reimbursement compliance?

At LegalZoom, we understand that managing expense reimbursement policies can be complex, especially for growing businesses trying to balance compliance requirements with operational efficiency.

Whether you're establishing your first expense reimbursement policy or refining an existing system, our business services provide the expertise and support you need to maintain compliance while focusing on growing your business.