A tax-efficient way for non-profits to reimburse their employee business expenses is accountable plans. These plans help reduce payroll taxes for the organization and allow reimbursements to be excluded form employees’ taxable income when properly structured and implemented.
Eligible Expenses
To qualify under an accountable plan, reimbursements must meet three core IRS criteria: 1) they must be for expenses that have a legitimate business purpose, 2) those expenses must be adequately substantiated, and 3) any excess advances must be returned within a reasonable period. “Reasonable” is generally interpreted under IRS safe-harbor rules, such as substantiating expenses within 60 days and returning excess amounts within 120 days.
Qualifying expenses commonly include business-related travel, meals, lodging, transportation, professional dues, continuing education, and necessary tools or supplies. Home office expenses may qualify in limited circumstances, but only when they’re directly tied to the employer’s business needs and not personal use.
A Formalized Policy
Although the IRS doesn’t require accountable plans to be in writing, a documented policy is generally recommended — especially for non-profits subject to heightened governance and audit scrutiny. A written plan helps demonstrate compliance and supports internal controls.
It’s also critical that reimbursements are clearly separated from wages. Accountable plan payments must be made in addition to regular compensation and can’t be used to recharacterize taxable wages as tax-free reimbursements. Misclassification can trigger payroll tax liabilities and penalties.
Recordkeeping Standards
The IRS also requires employers with accountable plans to keep good records for expenses that are reimbursed. For each expense, to the extent applicable, documentation should include the:
- Amount and date
- Business purpose
- Location (for travel-related costs)
- Business relationship of any individual involved
Receipts are generally required for lodging and for any expense of $75 or more. If your non-profit uses per diem rates for travel, receipts aren’t required. But help ensure your per diems align with current federal rates and that employees still substantiate the time, place, and business purpose of travel.
Integrating your plan with digital expense reporting tools can improve compliance, streamline approvals, and strengthen audit trails. Non-profits should periodically review their accountable plans to help ensure they remain aligned with IRS regulations, state laws, and organizational policies.
Establishing (Or Refining) An Accountable Plan
A well-structured accountable plan can provide tax benefits for non-profit organizations and their employees. It can also help ensure reimbursements are handled consistently, transparently, and in line with IRS expectations.
If your non-profit hasn’t reviewed its reimbursement practices recently, now is a good time to do so. We can help you assess whether your current policy meets accountable plan requirements, identify potential areas of risk, and implement a structure that supports both compliance and operational efficiency.
