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.