What Is a Non-Accountable Plan?
The TaxCuts and Jobs Act (TCJA) of 2017 eliminated itemized deductions for employees who incur unreimbursed expenses for company business for 2018 through 2025. Formerly employees could deduct out-of-pocket expenses for things like uniform cleaning and fees for professional organizations.
Companies can compensate for their employees' loss of this deduction by setting up a non-accountable plan, which is a way to provide employees with an allowance for business expenses or travel that does not need to be justified to an employer.
Money provided to employees in a non-accountable plan is considered taxable income and should appear on an employee's W-2.
Also known as an allowance plan, non-accountable plans differ from accountable plans in that the latter requires employees to provide adequate accounting to receive reimbursement. Since money received by employees under an accountable plan is for reimbursement of money spent on business-related expenses it is not taxable.
- Employees used to be able to deduct business-related expenses from their taxes, but the Tax Cuts and Jobs Act eliminated those itemized deductions until at least 2025.
- Businesses that want to continue to empower their employees to pay for expenses like uniform cleaning or dues to a professional organization can set up an accountable or non-accountable plan.
- A non-accountable plan is useful for companies that do not want to pre-authorize employee expenses.
How the Non-Accountable Plan Works
While money given to employees under a non-accountable plan is meant to be spent on business expenses, such as travel, meals or entertainment, the recipient may spend it any way they choose. For example, if an employer were to give an employee $500 to cover the cost of meals while away on a business trip, under a non-accountable plan, the employee could eat inexpensive food for every meal and pocket the savings.
As far as the Internal Revenue Service (IRS) is concerned, however, it is compensation that is paid in addition to salary or wages. As such, it is taxed as income. Employers may use a non-accountable plan for some expense items and an accountable plan for other expenses.
Non-Accountable Plan: Expenses and Tax
Any outlay on business-related expenses in a non-accountable plan may be claimed as a miscellaneous itemized deduction by the recipient on their 1040 Form. Such expenses are subject to a 2% limitation that dictates that filers who itemize may only deduct the part of the expenses that exceeds 2% of their Adjusted Gross Income (AGI).
As per IRS rules, expenses must be both ordinary and necessary to be deductible; otherwise, the IRS may deny them or consider them "lavish" and also not allow them, though this is rarely applied.
In the context of non-accountable plans, "ordinary and necessary" has a more lax definition depending on the context. "Ordinary" simply means something that is typically needed in the operation of a business. "Necessary" merely means an item is appropriate and helpful in the operation of a business. For more, see IRS Topic Number 514: Employee Business Expenses.
Non-Accountable Plan vs. Accountable Plan
In an accountable plan, the employee must substantiate what the expense was and what it was for, how much it was, and that it was incurred while doing business for the company. Accountable plan expenses are not considered taxable income. Any advances not used must be returned to the company in a timely fashion (as specified by the IRS).