Accountable Plan – Almost Like Tax Free Business Income – If Done Properly

• 2017 Tax Changes removed the ability to reduce income based on unreimbursed expenses.
• Taking an expense approach with a home office may leave you with a future tax bill for depreciation recapture.
• An Accountable plan allows business owners to reduce business income, while not having to report the money on personal tax returns.
• There are rules to follow, including reporting requirements, quick distribution of expenses, and ensuring no overpayments.
• When properly managed, An Accountable plan may help a business owner keep much more after tax income

As a business owner (or employee), it’s not uncommon to have to pay business expenses out of pocket. However, unlike pre-2017, it’s not so easy to claim the expenses on a personal tax return. Prior to 2017, the employee or business owner could simply declare the out of pocket expenses as an itemized unreimbursed expense. While not quite as advantageous as reimbursement (still paying FICA/Social Security tax), at least it was a write off for those who itemize.

Fast forward to our current tax environment rolling into 2025, and not only do far less people itemize their expenses because the standard deduction was raised to the point most take the standard deduction, albeit even for those remaining taking itemized deductions, the ability to reduce your income with unreimbursed expenses is gone with the wind.

However, there is still a way for a business owner (or employee for that matter) to receive reimbursement and not have to declare the money as income. Better yet, for business owners with a home office deduction, using an IRS approved strategy is far superior in many ways.

Setting Up an Accountable Plan: Requirements, Setup, and Benefits

Introduction
An accountable plan is a great tax strategy for an S corporation (S corp) owner. It allows the business to reimburse employees (including owner-employees) for certain expenses without including the reimbursements in their taxable income. This article will cover the requirements to establish an accountable plan, how to set it up, and the benefits it offers, especially for S corp owners. The reason the employee doesn’t report the income on their tax return is because it’s a reimbursement for only business expenses paid out of pocket.

What Is an Accountable Plan?

An accountable plan is a formal reimbursement policy under IRS guidelines that allows a business to reimburse employees for business-related expenses such as travel, meals, and home office expenses. The key advantage is that the reimbursements are tax-free for the employee and deductible as a business expense for the S corp, without being subject to payroll taxes.

Requirements for an Accountable Plan

To qualify as an accountable plan, the IRS requires that the plan meet three main criteria:

1. Business Connection
   • The expenses must be directly related to the business. Employees should only be reimbursed for legitimate business expenses, such as home office, travel, lodging, meals, or supplies incurred during business operations.
2. Substantiation
   • Employees must submit documentation (such as receipts, mileage logs, or expense reports) within a reasonable time period (typically within 60 days) to substantiate the expenses. The documentation should detail the amount, date, place, and purpose of the expense.
3. Return of Excess Payments
   • If any reimbursements exceed the actual business expenses, the employee must return the excess amount to the employer within a reasonable time (usually 120 days).

If these criteria are not met, the plan would be considered a non-accountable plan, and reimbursements would be treated as taxable income to the employee, subject to payroll taxes.

How to Set Up an Accountable Plan for an S Corp

Setting up an accountable plan for an S corp involves the following steps:

1. Create a Written Plan Document
   • Draft a formal written policy outlining the types of reimbursable expenses, the procedure for requesting reimbursement, the documentation required, and the time frames for submitting expenses and returning excess payments.
   • Specify the types of expenses that are eligible for reimbursement, such as business travel, meals, home office costs, phone expenses, and supplies.
2. Adopt the Plan
   • The accountable plan must be approved by the S corp’s board of directors or governing body. For single-owner S corps, the owner should document the adoption of the plan in the corporate minutes or other formal records.
3. Establish a Process for Expense Reimbursement
   • Set up a system for submitting expense reports, which may include forms for employees to use, guidelines on what constitutes adequate documentation, and submission deadlines.
   • Make sure that employees understand the need to provide detailed receipts and explanations for each reimbursed expense.
4. Monitor and Maintain Records
   • Keep records of all reimbursed expenses and the supporting documentation. This is important in case of an IRS audit.
   • Periodically review and update the plan to ensure it complies with any changes in IRS regulations.

Benefits of an Accountable Plan for an S Corp Owner

Implementing an accountable plan offers several tax benefits and other advantages:

1. Tax-Free Reimbursements
   • Reimbursements under an accountable plan are not considered taxable income to the owner-employee, so they are not subject to federal income tax, state income tax, or payroll taxes.
   • This can result in significant tax savings compared to receiving additional compensation.
2. Tax Deductibility for the S Corp
   • The S corp can deduct the reimbursed expenses as ordinary business expenses, lowering the corporation’s taxable income. This makes the accountable plan a tax-efficient way to manage expenses.
3. Compliance with IRS Requirements
   • An accountable plan helps ensure that the S corp complies with IRS rules regarding employee reimbursements, thereby reducing the risk of penalties or audits.
4. Reduction in Owner’s Out-of-Pocket Costs
   • For owner-operators who incur business expenses from their personal funds (e.g., home office or mileage), an accountable plan allows for reimbursement from the S corp, reducing out-of-pocket costs.
5. Flexibility in Expense Management
   • With a written accountable plan, the S corp can be more systematic in managing business expenses, ensuring that reimbursed expenses meet the business’s needs while remaining compliant with tax laws.

Commonly Reimbursed Expenses in an Accountable Plan

For S corp owners, the following types of expenses are commonly reimbursed under an accountable plan:

• Home Office Expenses: A percentage of rent, interest on mortgage, depreciation (without recapture), utilities, and internet, based on the proportion of the home used for business purposes.
• Mileage and Vehicle Expenses: The IRS standard mileage rate can be used for business-related vehicle use, or actual expenses can be reimbursed.
• Business Meals and Entertainment: Meals incurred while traveling for business or entertaining clients, subject to IRS limitations (usually 50% deductible).
• Travel and Lodging: Hotel stays, flights, and other travel-related expenses for business purposes.
• Supplies and Equipment: Office supplies, computers, and other equipment used in the business.

Best Practices for Maintaining an Accountable Plan

1. Regularly Review the Plan
   • Make sure that the plan is reviewed periodically and updated to reflect any changes in the business’s reimbursement policies or IRS guidelines.
2. Keep Detailed Records
   • Maintain thorough records of all expense reimbursements, including receipts, logs, and reports, to support the legitimacy of the expenses.
3. Educate Employees (Including Owner-Employees)
   • Ensure that everyone involved in the plan understands the requirements for submitting documentation and the consequences of failing to comply.
4. Consult with a Tax Professional
   • Periodically consult with a tax advisor to confirm that the accountable plan remains compliant with IRS requirements and to take advantage of any changes in tax law.

Conclusion

Setting up an accountable plan is a smart move for S corp owners who want to reimburse business expenses in a tax-efficient manner. By establishing a plan that meets IRS requirements, an S corp can provide tax-free reimbursements to its owners and employees while deducting the expenses for the business. Proper setup, documentation, and adherence to IRS rules are essential for maximizing the benefits and maintaining compliance.

Accountable plans offer flexibility, tax savings, and a structured way to manage business expenses, making them a valuable tool for S corporation owners.

If your business would like us to setup and help you manage your accountable plan, feel free to reach out and we can get started today.