Accountable Plans for S-Corp Owners: Maximize Tax Savings and Compliance
If you’re a S-corp owner and you reimburse yourself for expenses that you incurred personally, the IRS considers that taxable income unless you have an accountability plan.
So instead of having a taxable reimbursement (no accountability plan), you’ll have a federal and FICA tax-exempt distribution (with an accountability plan).
Win-win.
So why is this required?
Unreimbursed expenses such as home office expenses, employee travel, professional dues, etc. above 2% of adjusted gross income can no longer be deducted on Schedule A since Trump’s Tax Cuts and Jobs Act passed in 2017.
Enter accountability plans.
An accountability plan is a reimbursement agreement set up by an employer and is used to pay back employees for business-rated expenses.
Expenses come in three forms:
100% Business
100% Personal
Mixed Use
100% business expenses are paid by the business.
Ex: paper, advertising, business meals, rent, business computer, etc.
100% personal expenses are paid by you personally.
Ex: gym membership, Netflix subscription, groceries, etc.
Mixed used assets should be paid personally and then reimbursed by the business based on the percentage used for business.
Ex: home office, cell phone, internet, business mileage, etc.
An accountability plan is for mixed used expenses.
The creation of an accountable plan is usually drafted as a business policy and must meet three requirements:
Business Connection: expenses must have a business connection
Substantiation: expenses must be reported within a reasonable time (typically within 60 days).
Return of Excess amounts: excess reimbursement must be returned to the business (typically with 120 days)
In practice this may look like:
$20,000 quarterly distribution of profit in subject of being taken.
Prior quarter reimbursable expenses are $5,000.
This would mean:
$15,000 would be a taxable distribution and $5,000 would be a tax-free reimbursement.
The best part?
You’re reducing your overall net business income which reduces the reasonable salary testing requirement.
This means you could potentially decrease your salary (and subsequently your FICA taxes).