mission Matters The Ins and Outs of Nonprofit Expense Reimbursement November 21, 2023 Setting up an accountable plan at your organization will help reimburse employees and volunteers for out-of-pocket expenses. *Editor’s Note: This blog has been updated as of November 2023 for accuracy and comprehensiveness. An accountable plan for business expense reimbursement is something nonprofit employers can use to save employees tax dollars. Since salaries at a large number of nonprofit organizations nowadays are either stagnant or rising at a slow pace, it is important for employers to pinpoint other areas where they can save their employees money. What is the purpose of an accountable plan? When you provide employees and volunteers with fixed amounts or stipends for out-of-pocket business expenses and do not require an accounting for the actual expense, then most likely, your expense reimbursement is not tax-free to the employees and volunteers. With an accountable plan in place, however, employees and volunteers of the organization who provide an appropriate accounting for actual business expenses incurred would not require the employer to report these reimbursed amounts as earnings on an employee’s W-2 form, so accordingly, the employee will not be taxed on the reimbursed amounts. Does the plan have to be in writing? A formal written plan, while not necessary, is recommended and helpful for organizations to avoid IRS scrutiny. In addition, a written plan provides a platform for your organization to describe the expense reimbursement requirements should an employee have any questions. Does the IRS have any strict rules regarding the plans? According to the IRS, all expenses covered in the accountable plan must be: Connected to business Expenses must be documented Reasonable, meaning anything beyond IRS allowances will be treated as taxable income. Equal to or less than the employee’s original business expense. All reimbursed business expenses must be accompanied by the following information: The business relationship of the people entertained and the purpose of the expense The amount of the expense and the date The location of the purchase, meal, trip, event, etc. Read more about deductible business expenses and 2023-2024 per diem rates in our recent blog, IRS Updates 2023-2024 Per Diem Rates for Business Travel. Reimbursement rules Some things to keep in mind: In most cases, if an expense could otherwise be classified as a business deduction for an employer, it can qualify as a tax-exempt reimbursement under the accountable plan. Meals and entertainment expenses can be reimbursed at 100% under the accountable plan, while only 50% would be deductible by the employee if the organization did not have a plan. It is crucial that you identify the reimbursement or expense payment and keep other amounts separate from them. The reimbursed expenses allowed by the plan must be in addition to the regular compensation of the employee. If you provide your employees funds in advance to cover expenses, and they are not used for a qualified purpose, the IRS will treat them as reimbursements under a non-accountable plan, and the employee will be subject to tax on the reimbursement. If you do not have a plan in place already, setting one up could be worthwhile for your employees and provide them with valuable tax benefits. Contact any member of our Not-for-Profit Services Team for more information on complying with IRS rules while setting up a plan.
