Accountable Plans: Reimburse Employees the Tax-Smart Way

In many types of businesses, it's common for employees to spend money on behalf of the company — such as for travel, client meals or supplies. How those expenses are handled can have major tax consequences for both employers and employees. An accountable plan can help. It keeps payments tax-free for employees and deductible for the business.

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, makes these plans even more important. The law permanently eliminates the ability of employees to deduct unreimbursed business expenses on their individual income tax returns. In this environment, accountable plans may be essential to retaining employees who frequently incur potentially reimbursable business expenses.

Benefits for Employers and Employees

Before 2018, employees could claim a miscellaneous itemized deduction for certain job-related expenses, subject to a 2% of adjusted gross income floor. So if their employer didn't reimburse them for these expenses, at least they potentially could get a tax deduction.

But the TCJA suspended this deduction, and the OBBBA has now made the suspension permanent. As a result, employees paying business expenses out of their own pockets will be more concerned about reimbursements — and potentially having to pay tax on them.

Without an accountable plan, reimbursements count as taxable wages. That means the employee must pay income taxes and his or her share of payroll taxes (Social Security and Medicare) on the reimbursements. The employer must also pay its share of payroll taxes on them.

With an accountable plan, reimbursements are tax-free for income- and payroll-tax purposes and deductible for the company. (Meals are generally still only 50% deductible, however.)

4 Requirements

Accountable plans save taxes for both employees and employers, but the IRS requires four conditions to be met for a plan to qualify:

1. Business connection. The plan must provide reimbursements or allowances only for expenses directly related to the company's operations. Mileage, lodging, meals and travel qualify. Entertainment costs, such as golf outings, guided eco-tours, spa treatments and sporting event tickets, don't qualify.

2. Substantiation. Expense reimbursements require timely proof, such as receipts and expense reports. The documentation should show:

• The amount and business purpose of the expense,
• The time and place of any travel,
• The date and description of any business gifts, and
• The business relationship to the company of each person receiving a gift.

Per diem rates can replace receipts for meals and lodging, but amounts above those rates count as wages. If the company pays a per diem travel allowance that doesn't exceed the federal per diem rate, employees can retain any excess of the per diem allowance over actual expenses. Doing so won't disqualify the accountable nature of the plan or require any excess to be treated as additional taxable wages. (See "New Business Travel Per Diems for 2026" below.)

3. Return of excess. The plan must require employees to pay back advances that exceed actual costs. If not returned, the excess is subject to income taxes and federal payroll taxes.

4. Reasonable time frames for reporting and repayment. The IRS allows two safe harbor methods: a fixed-date approach (30 days for advances, 60 days to substantiate and 120 days to return) or a periodic-statement approach with quarterly reminders. However, facts and circumstances may also dictate what's reasonable. For example, an employee on an extended out-of-town assignment would have more time to substantiate expenses and return any excess amounts than someone on an overnight business trip.

Practical Issues

The advantages of accountable plans are clear. Employees know they'll be reimbursed and won't be taxed on amounts they pay out-of-pocket for qualified business expenses. This can help with employee retention and recruitment. Employers avoid additional payroll tax liability and can still enjoy tax deductions. Records are cleaner because reimbursements are separate from wages.

But accountability requires structure. Written policies, consistent enforcement and timely paperwork are critical. A plan applied unevenly or without requiring returns of excess advances can fail IRS scrutiny. Many companies use federal per diem rates to simplify the process.

Bottom Line

Given the recent tax law changes, implementing an accountable plan can be a smart business move. Doing so can deliver tax savings and foster goodwill with your employees. But your plan must be set up and administered properly. The rules are strict, and small mistakes can turn reimbursements into taxable wages. Contact your Porte Brown tax advisor for help devising an expense reimbursement program that complies with the IRS rules and maximizes the benefits for you and your team.

New Business Travel Per Diems for 2026

The IRS recently updated the per diem rates for business travel for fiscal year 2026, which runs from October 1, 2025, through September 30, 2026. For most areas within the continental United States, the per diem rate is $225 for post-September 30, 2025, travel ($151 for lodging and $74 for meals and incidental expenses). However, in certain high-cost areas within the continental United States, the per diem rate is $319 for post-September 30, 2025, travel ($233 for lodging and $86 for meals and incidental expenses).

To further complicate matters, certain tourist-attraction areas count as high-cost areas only on a seasonal basis. Additionally, the specific locations and dates for high-cost areas change somewhat from year to year.

If your company uses per diem rates, employees generally aren't required to provide receipts. But they still must substantiate the time, place and business purpose of the travel.

Per diem reimbursements generally aren't subject to income or payroll tax withholding or reported on the employee's Form W-2. It's also important to note that per diem rates can't be paid to individuals who own 10% or more of the business. Contact your tax advisor for guidance on how to use the simplified per diem method and obtain a current list of high-cost areas and dates.