Companies need money to keep running, so you’re probably spending money on your business regularly. When you’re a small business or a solopreneur, it’s common to use personal funds to make business purchases or advance some cash to your company and reimburse yourself later.
Accountable plans help S Corp owners properly track expenses and reimburse themselves for business-related costs tax-free.
What’s an S Corp accountable plan?
An accountable plan allows a company’s employees to receive reimbursement for business expenses paid from personal funds.
When it comes to an S Corp, the business owner may also be an employee. Before the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, you could deduct unreimbursed employee expenses you’d paid for with personal funds on Schedule A of your personal income tax return. However, the TCJA ended this kind of miscellaneous itemized deduction, pushing self-employed workers to find a new reimbursement arrangement.
Now if an employee of an S Corp (like you, the owner-employee) makes business purchases with their own money, they can use an accountable plan to reimburse themselves using the business’s funds.
And since you or your employees receive the money as a reimbursement, it isn’t taxable income. This is a key feature of accountable plans. They let your company to reimburse you personally for business expenses without impacting your income taxes.
Accountable plans must follow IRS requirements. You don’t need to write down the reimbursement plan, but it must follow an established policy. The money must be for reimbursement of expenses incurred for services performed as an employee, and the reimbursement must not be an amount that they would have received as wages.
Both the business and employee must be able to substantiate the actual cost of the reimbursed expense and any reimbursement in excess of actual cost may be taxable to the employee as compensation or a fringe benefit.
Benefits of accountable plans
Accountable plans have a clear benefit for S Corp owners. Since the IRS doesn’t consider reimbursements through these plans to be wages or distributions from the business, they aren’t subject to income taxes. Without an accountable plan, the money might be taxable.
These plans can be beneficial when you have expenses that are partially but not entirely business-related. For example, imagine you spend $100 per month on a cell phone plan. You use the phone for business purposes 70% of the time and for personal reasons 30% of the time.
You can use an accountable plan to reimburse yourself for 70% of the cost. This means getting $70 out of your company, tax-free, to pay for your phone bill each month. Your business can then write that off as an expense.
However, these expenses are scrutinized by the IRS and an accountable plan is not a way for your business to pay for personal expenses. There must be a legitimate business purpose for an expense to be included in an accountable plan and reimbursed.
Accountable plan requirements
There are three key rules that you must follow when using an accountable plan.
You cannot reimburse yourself for all purchases or expenses. Instead, you can only reimburse yourself for business-related costs that are a reasonable amount based on the business use of the purchase.
Additionally, you can’t reimburse yourself for 100% of the cost of a computer if you play games on it 80% of the time and use it for work 20% of the time. You can only reimburse 20% of the cost.
Document the expenses
You need to have documentation of the expense showing the amount spent. A receipt is typically sufficient. You should also have documentation of how the purchase relates to the business.
Return excess reimbursements
If you reimburse yourself for more than you should have, tax law requires you to return the excess money to your business account within a reasonable period of time.
What expenses qualify for an accountable plan?
Many different expenses qualify for accountable plans, including:
- Home office expenses
- Alarm and security
- HOA fees
- Mortgage interest
- Property taxes
- Car mileage
- Phone and internet
- Food and meals
- Some travel expenses (lodging on business trips)
- Business entertainment
- Training and education
- Marketing fees
- Professional dues
How Accountable Plans Impact Your Taxes
A primary benefit of accountable plans is that they don’t impact your personal taxes. The IRS doesn’t treat the money you receive from your S Corp to reimburse these expenses as part of your gross income. This means you don’t need to report the reimbursements on your tax return when you file.
As for your company, accountable plan reimbursements are considered business expenses. When you file your S Corp taxes, you treat them as an expense. This reduces your company’s revenue by the amount reimbursed over the year.
If you don’t follow accountable plan rules, the IRS will treat your reimbursement plan as a “Non-Accountable Plan,” and any expense reimbursements you make to employees will be considered wages. While these reimbursements can lead to a marginal business tax deduction, the additional Medicare and employment taxes you’ll have to pay will offset any tax savings.
How to setup and run an accountable plan
One of the best things about an accountable plan is that it’s incredibly easy to set up and run. You don’t need to write down an official plan, though having a clear process is undoubtedly in your best interest. Writing it down can help with that.
Collective offers an accountable plan feature for business owners to help them develop and execute their plans. If you need an example of a written plan, you can check out Collective’s example.
Your plan could include the following:
- What is and isn’t reimbursable under the plan
- Protocols for documenting expenses and substantiation
- How the plan applies to employees and non-employees (such as independent contractors)
- How soon to submit expenses after they are incurred or paid
- When employees can expect reimbursement after expense submissions are received
- How quickly to return unsubstantiated reimbursements to the company
You don’t have to include all these suggestions, but they can give you a starting point for determining how you want to run your company’s plan.
Once you have a plan, you can start to reimburse yourself for expenses according to the accountable plan policies you set. Be careful to keep track of your reimbursements and the documentation showing why you made those reimbursements.
A good way to handle things is to do employee reimbursements once per month. Sit down and look at all the business expenses you paid with personal funds. Add them together, transfer funds from your business account to your personal account for that amount and note it as a reimbursement.
Also, save any receipts or other documentation in a safe place so you can refer to them as needed.
Accountable plans offer S Corp owners a flexible way to reimburse themselves for business expenses paid using personal money. They’re easy to set up and use, but remember to document your expenses carefully in case the IRS wants to check your records.
TJ Porter is a freelance writer based in Boston, Massachusetts. He began covering finance while earning a degree in business at Northeastern University in Boston, Massachusetts and enjoys writing about credit, investing, real estate topics. When he’s not writing, TJ enjoys cooking, sports, and games of the video and board varieties. You can contact him at find more of his work at TJPorterWriting.com