© 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]
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
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 |
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: ___________________________
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