Did you know that your practice could be at risk if it reimburses employees for business expenses but doesn’t have an “accountable plan”? An accountable plan comprises policies and procedures for handling and reimbursing employee business expenses according to IRS guidelines. Without such a plan, your practice could be a prime target of the IRS.
Why all the fuss?
When a physician practice has an accountable plan in place, qualifying business expense reimbursements and allowances aren’t included on employees’ W-2s, nor are they subject to employment taxes or withholding requirements.
On the other hand, if an accountable plan isn’t in place, reimbursed amounts and expense allowances must be included in the employee’s gross income, and the amounts are subject to employment taxes and withholding. If your practice doesn’t properly report this income, pay its share of employment taxes, and withhold the employee’s share of employment taxes as well as the appropriate amount of income taxes, it could become subject to back taxes and penalties.
For your plan to withstand IRS scrutiny, it’s advisable — though not required — to put it in writing and establish a standard expense report form to be used by your employees. Depending on the size of your practice, consider designating an individual or a department to be responsible for enforcing this policy.
Many practices are small corporations where the doctors are not only owners but also employees. In such cases, the IRS rules on expense reimbursement apply to these physicians as well. So they also must turn in expense reports and otherwise comply with the practice’s accountable plan policies.
What the IRS has to say
According to the IRS, a “deductible business expense must be both ordinary and necessary in relation to the taxpayer’s industry” — in your case, the practice of medicine. It goes on to distinguish a business expense as “… ordinary if it’s customary or usual in the day-to-day operations of the practice or reasonably related to the taxpayer’s trade or business, while a necessary expense is one that’s appropriate and helpful in developing and maintaining the taxpayer’s business.”
Following is an overview of more common expenses:
Mileage. In 2012, employees can claim 55.5 cents per mile driven for business purposes. Mileage between employees’ homes and your office isn’t reimbursable. But if your practice has multiple offices and employees travel between them, that mileage is reimbursable. Consider setting fixed interoffice round trip rates to help eliminate guesswork and fudging on total miles driven. Employees should substantiate the destination and reason for all mileage claimed on their expense reports.
Cell phones. If you provide cell phones as part of a compensation package or as a way to attract new employees or boost morale, any personal use of the phone must be reported as taxable income to the employee. However, if you provide the phone for certain specific business reasons — such as if you require an employee to be on call or you need to be able to contact him or her at any time for work-related emergencies — under recent IRS guidance, the value of any personal use need not be reported.
Continuing medical education. Continuing medical education (CME) expenses should be preapproved by a physician or office manager. The employee should include in the authorization request the cost of the seminar, travel and lodging. Practices should set a reasonable maximum dollar reimbursement limit per CME occurrence.
For business expenses to be considered part of an accountable plan under IRS guidelines, the employee must meet three requirements in accounting for them:
1. The expense must be incurred because of a business connection.
2. Documentation must be provided as to the amount spent, the date and place of the expense, the business purpose, and the business relationship if another person is involved.
3. The employee must return any sums that were advanced in excess of expenses.
Make sure your plan outlines what’s required for substantiating business expenses and includes a deadline for turning in all receipts and documentation. A monthly deadline for submitting reimbursement forms and receipts will help your practice keep accurate documentation and accounting of its expenses.
Moreover, your plan should include an authorization requirement that states employees who incur expenses above a preset limit must have signed authorization from a supervisor or shareholder before incurring the expense.
Keeping good accounts is good practice
Establishing an accountable plan for business expense reimbursement is critical for your practice. It not only can help you control overall costs, but also can provide your employees needed guidelines for understanding what’s reimbursable and what’s not.