How To Maximize Business Deductions With A Plan

“It is time to restore the American precept that each individual is accountable for his actions.” - Ronald Reagan

4-minute read

• A Brief History

• The Deduction Is In The Details

• One Big Beautiful Bill

• Go For The Record

An “accountable plan” is essentially a smart approach to reimbursing your employees—and yourself—without triggering the IRS's scrutiny. As a business owner, you often dig into your own pockets for legitimate business expenses. Whether it's a small amount here or a larger cost there, these out-of-pocket expenses can add up.

In the past, you could deduct these costs on your personal tax return if you had enough to claim.

A Brief History

Then came the Tax Cuts and Jobs Act of 2017. This major legislation essentially wiped-out itemized deductions for business expenses for the average taxpayer. So, what do you do if you still need essentials like copy paper or if you have to drive to meet clients (or use your personal cell phone to call them)? Are you just expected to absorb those costs? This is where accountable plans come into play.

These formal guidelines detail how you reimburse employees for their expenses and specify which costs qualify for reimbursement. Remember, reimbursements are not classified as wages, meaning they remain tax-free. For instance, when Lynn and his late wife, Jackie, ran the Eastern Onion Singing Telegram Service, about one-third of a performer’s paycheck came from reimbursements for personal vehicle use.

Sounds beneficial? It absolutely is—but it requires diligence and effort.

The Deduction Is In The Details

While you don’t need to submit your accountable plan to the IRS, if you want your deductions to withstand scrutiny (and let’s face it, no one wants to face an audit), be thorough in your planning.

Let’s focus on the plan itself for a moment. While a written document isn’t mandatory, the value of clarity cannot be overstated. Having everything spelled out ensures transparency for everyone in your business—and the IRS appreciates documentation.

Your plan should explicitly outline the timeframe employees have to submit expenses, how they request reimbursement (including necessary documentation), what you’ll cover, the maximum reimbursement limit, and when they must return any unused reimbursement funds. The IRS prefers it when your plan clearly ties expenses back to legitimate business activities.

All expenses must be substantiated within a “reasonable period,” and any funds not spent must be returned within that same timeframe. The IRS indicates that 30, 60, or 120 days are “reasonable” timeframes, depending on whether it’s about the employee submitting expenses, you processing payments, or employees reimbursing any excess.

One Big Beautiful Bill

You might be wondering, “What about minor expenses like tips?” The new ONE BIG BEAUTIFUL BILL ACT (OB3) offers specific guidelines on this. Do you really need records for such small amounts? The IRS isn’t completely forthcoming about what “small” constitutes. Some business owners think that tracking expenses over ten dollars is prudent, while others might set that threshold at five. Always check the IRS for clarity: IRS.gov/Newsroom/One, Big, Beautiful Bill Act: Tax deductions for working Americans and seniors.

Don’t take unnecessary risks. Keep all documentation, avoid guesswork, and document everything meticulously. Daily updates regarding the OB3 regulations are emerging. Remember, many tax guidelines are constantly evolving.

Go For The Record

Yes, maintaining detailed records can be tedious, but they bolster your case significantly. Organize them alongside your plan. Invest in a dedicated logbook (which is a business expense itself) and ensure you keep all receipts, bills, and credit card statements. Photocopies work just fine.

Be meticulous in detailing those expenses: record the amount, time, place, and reason for each expenditure. Instead of saying, “Twenty bucks for gas,” be specific: “Twenty bucks for gas for this employee, on this date and time, at this gas station, because this employee was enroute to meet this client—and here’s how this relates to our business.”

Here are additional tips: If you receive a lump-sum bill, attach a detailed breakdown of the expenses it covers. Even if you apply the standard IRS mileage rate for employees’ vehicle use, they still need to report all elements of their business driving to you. Gather as many details in writing as possible—there’s truly no substitute for thoroughness. For partial days of business activities, prorate per-diem rates for your employees appropriately.

Finally, keep every scrap of paper for your records (and organize it, if possible). You will be grateful you did.

BE THE ROAR not the echo®

Janet, the Tax Wizard