 Hello and welcome to this session in which we will discuss accountable and non-accountable plan. So what is an accountable plan? Basically, it's an agreement between the employee and the employer to reimburse the employee for expense incurred on behalf of the employer. When you work for a company, sometimes what's going to happen is this. They're going to ask you to use a vehicle, a cell phone, a computer for the company's convenient. Simply put, you have to use certain items, assets, services for the benefit of your employer. Well, what happened is this. Those expenses are handled differently than your wages. In other words, the company might tell you to keep track of those expenses, then submit the expenses to the company and we will reimburse you. Sometime they might say, guess what? We're going to give you, for example, per month, $2,000 and you pay for those expenses and we don't care how you pay, what type of services you have. We gave you $2,000. If there is an agreement specifically identifying how much you can spend and you need to submit your receipts, then this is an accountable plan. In other words, everything is written down. How much you spend and you'll have to submit for your company and your company will reimburse you. When the company reimburs you, obviously that's a deductible to the company. It's a right off. So the company, as far as paying you for those expenses, it's a deduction. Of course, it's a deduction. However, if the agreement is an accountable plan, accountable means you have to submit everything and they will reimburse you for those expenses, then it's an accountable plan and as a result, you don't have that extra income reported on your W2. So the reimbursement that you receive is not reported on your W2. So you don't have to worry about the money that you spent on your cell phone, home office expense, the computer or any other vehicle that you rented for the business. You don't have to worry about those reimbursement because what you do is you pay for it. You submit your receipts to the company. The company reimburse you. So it's basically it's a wash. It doesn't even appear on your W2. Now obviously the company will have their own deductible expense. Of course, they will because they are paying you for those services. And those expenses are deductible for AGI as far as the company is concerned. Of course, they are part of their operating expenses. Now, this accountable plan don't apply if you're the owner operator of the business. So if you're a sole proprietorship, you can't do that. That's not how it works. It only applies to SNC corporation employees because you have an employee-employee relationship when it's a C Corp or an S Corp. Now we're going to discuss specifically about the rules about accountable plans because it's very specific. We have to know what the IRS requires you to do in order to qualify for a plan to be an accountable plan. Let's go ahead and discuss the details. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. The accountable plan requires the employee to satisfy these two requirements. So there's going to be two requirements that they must, they have to be a must in order for the plan to be an accountable plan. The first one is to substantiate the expense. Otherwise, you cannot have a deduction. What's substantiate? It means you have to provide evidence. You have to provide receipts, cancel checks, purpose of the meeting, purpose of the expense, the business relationship. So plan must require adequate accounting to the employer for expense reimburse. So you have to submit the necessary information, which is the amount. Of course, you're going to submit the amount, the business purpose. Why did you spend this money? The business relationship of the taxpayer to the person. Why are you spending money? What's the purpose? Obviously, usually to grow the business or to maintain a client. Erequent accounting is submitting a record with receipts to the employer or using what we call the per diem allowance. So we're going to talk about the per diem allowance that's no more than the federal per diem rate. We'll talk about this shortly. So simply put, you have two options. Notice it's either or. You have to substantiate. It means provide evidence, including receipts, cancel checks, purpose of the meeting, the amount, so on and so forth. Or you can use the per diem allowance as said by the federal government. We'll see what that is in a moment. And any accessory reimbursement must be returned to the employer because sometimes what they do is this. They'll give you the money. They'll give you, for example, for this month, $2,000. Well, you can spend it on vehicle expense, cell phone expense, computer expense, whatever you need to do. However, you're going to submit the receipts and you submitted 1,600 worth of receipts and evidence about business expenses. It means you have $400 left. You don't keep that $400. You would return the $400 because it's access reimbursement. Okay, sometimes often what happened first you spend the money, then you'll ask for reimbursement. Well, if they gave you the money upfront, make sure you return it. Make sure you return it, otherwise it becomes taxable. So the taxpayer need to have a good record for the employee or self-employed expenses. And in some cases, as we said, the per diem allowance will be deemed substantiation. So what's that per diem allowance or deemed substantiation? So rather than keeping receipts, there's something called per diem allowance. And that's a fixed amount provided to individual to cover daily expenses while traveling for business purposes. For example, I just I'm throwing this number out. For example, the government, what says, if you're traveling $75 per day is a fair amount for meals. To simply put, you don't have to keep track of your receipts for meals. Just say, I spent $75. And that's fine. There's a rate for that. There's a rate for travel. There's a rate for everything. As long as rather than keeping receipts, you would say, I'm going to be using the per diem allowance. Now, what happened if you spent $100? Well, you can only expense $75. That's the per diem allowance. So that's why you want to keep track of your receipts in case you spent more. You want to be reimbursed for more. So it's intended to cover expenses such as meals, lodging, incidental costs that a person might incur while away from their usual place of business or presidents. Per diem allowance are said by the government. Usually they would use the federal per diem allowance. The reason for this is to simplify expense reporting. So rather than keep in track of all these receipts, canceled checks, purpose of business meetings, so on and so forth, you would use the per diem just for simplicity. And this way they would reimburse you. They will get a deduction and the amount that you pay is not taxable. Let's take a look at an example. Adam submitted canceled checks for his business travels and meetings to the accounting department. The checks shows the place and the amount of the expenditure. Well, guess what? The expense is not reimbursed. I'm sorry. The deduction is not allowed. Why? Because you need to also have the business relationship and the business purpose as well. So Adam will have to justify why did they spend this money? What's the relationship between them and the other individuals? What's the business purpose? So you need those. The point I'm trying to make is substantiation is an important feature when it comes to accountable plan. So you need to have everything. Unless you want to use the per diem allowance. Let's talk now about the non-accountable plan. Think of the non-accountable plan as an allowance. Here's what's going to happen here. We're going to give you the plan does not require adequate accounting record or return of accessory, reimbursement or both. Simply put, we're going to give you $2,000 for this month as an allowance. And you could use this money for business travel, meals, whatever business expense you are required to carry on. So think of an allowance. Now here's what's going to happen. If we gave you 2,000 allowance for monthly car expense, you don't have to return if you did not use it. But guess what? This amount is taxable to you. So you're not accountable for it. That's what's called non-accountable. We're going to give it to you. You can use it. Reimbursement amount received under this plan are included in gross income. So for example, if they gave you $2,000 allowance for your monthly car expense, let's assume you're a travel agent. Well, that's 2,000 times 12. And they're going to add to your W2, 24,000 of taxable income. That's the bad news because now this amount is taxable. Any allowable expense are deductible in the same manner as a reimburse expense. The company could still deduct it. The company will deduct 24,000 under the non-accountable plan. This is bad news for employees. Why? Because now you're going to include the income, but that amount cannot be deducted. So your expenses cannot be deducted. Because as an employee, you have only Schedule A, the miscellaneous itemized deduction, to deduct your business expense. And from 2018 to 2025, that Schedule A deductions are suspended for miscellaneous expenses. Therefore, you're going to end up including the income and not being able to deduct the expenses. So if you can include the income, then deduct, for example, 22,000 of expenses. That's all. That's how much you use that. At least you have 2,000 of taxable income. Or maybe you use the whole thing. And therefore, none of it is taxable because you included an income, then you took it out in deduction. But since the deductions are not allowed, then you cannot deduct it. Therefore, it's taxable, but not deductible, which is not good. Okay? So you have to be careful if you have a non-accountable plan. If you have an accountable plan, but the employee failed to follow the rules, which is return the access, reimbursement, or the allowance, whatever you want to call it, and they don't keep track, then it becomes a non-accountable plan treatment. Then guess what? They will tell this individual, huh? We don't have record of what's going on here. We're going to include this in your income because you're not returning the access reimbursement. You're keeping the money and you're not providing us with the receipts. Therefore, it's taxable to you. What should you do now? Well, go to Farhat lecture, whether you are a CPA candidate, an accounting student, or an enrolled agent, and work additional MCQs that's going to help you understand this concept better. Good luck. Study hard. And of course, stay safe. Accountable and accountable plan and non-accountable plan are an important topic for tax purposes. Good luck.