© 2025 Prepared by Xinyi Cindy Yu, CPA CFP MBA as a draft and starter for clients.

Simplified Small Business Accounting Policy

Effective Date: __________________[Insert Date]
Applies to: _____________________[Your Company Name]

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1.  Purpose

This policy defines the accounting treatment for fixed assets, low-cost purchases, and employee fringe benefits, ensuring IRS compliance and maximizing available tax deductions and incentives.

** This policy needs to be updated each year with latest tax law requirements.

2.  Capitalization & Expense Policy

2.1 Capitalization Threshold

Assets costing $2,500 or more per unit will be capitalized and depreciated under IRS MACRS guidelines.

2.2 De Minimis Safe Harbor

Under Reg. §1.263(a)-1(f), items costing $2,500 or less per item/invoice will be expensed.
Applicable items: laptops, mobile devices, tools, furniture, software, etc.

2.3 Section 179 Expensing (2025)

• Deduction limit: $1,220,000
• Applies to tangible property used >50% for business
• Limited by taxable income and phase-out thresholds

2.4 Bonus Depreciation (2025)

• 60% immediate deduction for qualified assets
• Remaining basis depreciated via MACRS
• Automatically applied unless opted out

3.  Repairs & Maintenance

Routine maintenance costs that do not improve or extend asset life will be fully deductible as incurred.

4.  401(k) Safe Harbor & Profit Sharing Plan

The company may sponsor a qualified 401(k) plan with optional Safe Harbor and profit-sharing provisions.

4.1 Safe Harbor Contributions

• Option 1: 3% non-elective to all eligible employees
• Option 2: Match 100% of first 3% + 50% of next 2% deferred
• Contributions are 100% vested immediately

4.2 Employee Deferral Limits (2025)

• Up to $23,000 (under age 50)
• Plus $7,500 catch-up for age 50+

4.3 Profit Sharing

• Up to 25% of compensation (limit: $345,000)
• Combined total (employee + employer) capped at:
  • $69,000 (or $76,500 with catch-up)

4.4 Vesting & Administration

• Safe Harbor: fully vested
• Profit sharing: may follow a graded schedule
• Administered per IRS and ERISA rules with annual compliance testing

5. Employee Fringe Benefits

The company may offer tax-qualified fringe benefits, deductible by the company and often tax-free to employees.

5.1 Educational Assistance (IRC §127)

• Up to $5,250/year per employee
• Covers tuition, books, fees (not meals or lodging)
• Requires a written plan

5.2 Job-Related Training

• Fully deductible if it maintains/improves job skills
• Examples: seminars, CPA/CPE, software courses
• Must not qualify employee for a new trade or profession

5.3 Health & Fitness (IRC §132, §106)

• Onsite gym: deductible and tax-free
• Offsite memberships: generally not deductible unless included in a medical or taxable fringe program

5.4 Meals & Entertainment (IRC §274)

• Meals for employer convenience:
  • 50% deductible (100% if de minimis or for company events)
• Entertainment: not deductible

5.5 Commuter Benefits (IRC §132(f))

• Monthly exclusion (2025):
  • $315 for parking
  • $315 for transit
• Must be part of a qualified transportation plan

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5.6.  Summary of Fringe Benefit Limits (2025)

Benefit Type	Annual Limit	Deductible?	Tax-Free to Employee?
Educational Assistance	$5,250	✅ Yes	✅ Yes
Job-Related Training	No limit	✅ Yes	✅ Yes
Onsite Gym	N/A (facility cost)	✅ Yes	✅ Yes
Offsite Gym	N/A	⚠️ No*	⚠️ No (unless taxable)
Transit / Parking	$315/month ($3,780/year)	✅ Yes	✅ Yes
Meals (on premises)	N/A	✅ 50–100%	✅ Sometimes

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5.7. Documentation Requirements

To support deductions and IRS compliance, the company will maintain:

• Receipts and vendor invoices
• Proof of employee participation in eligible programs
• Written plan documents (education, commuter benefits, etc.)
• Payroll records for fringe benefit reporting (W-2 where applicable)

5.. Annual Election & Compliance

• Each year, the company’s accountant or tax preparer will:
  – Elect De Minimis Safe Harbor with the federal tax return
  – File Form 4562 for Section 179 and depreciation schedules
  – Track all fringe benefits provided to employees
  – Ensure W-2 reporting for any taxable fringe benefits

6. Home Office Reimbursement Policy

The company may reimburse employees or owners for the business use of a home office, provided the space meets IRS criteria and reimbursement is made under an accountable plan.

6.1 IRS Qualification Criteria

– The space must be used **regularly and exclusively** for business.

– It must be the **principal place of business** or used to meet clients or perform administrative functions.

– A dedicated room or clearly defined portion of a room may qualify.

6.2 Reimbursement Methods

– The company may reimburse based on:

• The **Simplified Method**: $5 per square foot, up to 300 sq ft ($1,500/year max), or

• The **Actual Expense Method**: Based on the business-use percentage of eligible home expenses (e.g., rent, mortgage interest, utilities, insurance, repairs).

– Reimbursement is only allowed under an **accountable plan** with supporting documentation.

6.3 Documentation Requirements

– Employees/owners must submit:

• A written request with square footage or percentage used

• Utility bills, rent/mortgage statements, and other substantiating documents

• A signed declaration that the space is used exclusively and regularly for business

– Reimbursements will be excluded from employee income if properly documented.

7. Overall Documentation and Compliance

To support deductions and IRS compliance, the company will maintain:

• Receipts and vendor invoices
• Documentation for fringe benefits and reimbursements
• Proof of employee participation in eligible programs
• Written plan documents (education, commuter benefits, etc.)
• Payroll records for fringe benefit reporting (W-2 where applicable) etc

Each year, the company’s tax preparer will:

• Elect the De Minimis Safe Harbor on the tax return
• File Form 4562 for Section 179 depreciation
• Track and report applicable fringe benefits
• Ensure proper W-2 reporting where required etc.

 

Acknowledgment

Approved By: ____________________
Title: ___________________________
Date: ___________________________