Accountable Plans: The Right Way to Reimburse Yourself As an S Corp Owner

As an S Corp owner, you always look for ways to manage your business income while maximizing your tax advantages efficiently. One key method that small business owners can use is an accountable plan. This IRS-approved tool helps S Corp owners reimburse themselves for business expenses without facing unnecessary tax consequences. In this article, we’ll take a closer look at what an accountable plan is, why it’s beneficial, and how to set one up correctly.

We’ll also touch on some key terms like S Corp status, self-employment taxes, and limited liability protection so you can understand the nuances of reimbursing yourself the right way.

What is an S Corp?

Before we dive into accountable plans, let’s review what an S Corporation (S Corp) is. An S Corp is a type of business entity that elects “Subchapter S” status under the Internal Revenue Code. This enables the corporation to distribute its income, losses, deductions, and credits directly to its shareholders, who then report these amounts on their personal tax returns for federal tax purposes.

Unlike a C Corporation, an S Corp helps small business owners avoid double taxation, where income is taxed at both the corporate level and again on personal income tax returns. Instead, income is reported directly on shareholders’ personal tax returns, which helps streamline tax obligations for small business corporations.

To qualify as an S Corp, a business must meet certain IRS requirements:

• Must be a domestic corporation
• Only have one class of stock
• Have no more than 100 shareholders
• Shareholders must be individuals, certain trusts, or estates (no partnerships, corporations, or non-resident alien shareholders)

Now that we understand the basics of an S Corporation, let’s explore accountable plans.

What is an Accountable Plan?

An accountable plan is a structured reimbursement policy that enables S Corp owners and employees to receive reimbursements for business-related expenses without those amounts being considered taxable income. These expenses could include use of home office, travel, meals, supplies, or mileage related to day-to-day operations. The Internal Revenue Service (IRS) has strict rules under the Internal Revenue Code for what qualifies as an accountable plan.

Under this plan, the business reimburses expenses that are:

1. Business-related: Expenses must be for the business’s benefit and not personal expenses.
2. Substantiated: You must provide records or receipts to show the amount, time, place, and business purpose of the expenses.
3. Returned if excess: If you receive more money than the actual expense, the excess must be returned to the business within a reasonable timeframe.

Why Do S Corp Owners Need an Accountable Plan?

Image credit: Freepik

1. Tax Advantages

Without an accountable plan, reimbursements are considered taxable income. This means they could increase your taxable income, leading to higher federal income tax and self-employment taxes. An accountable plan allows these reimbursements to be tax-free, helping S Corp owners reduce their personal income tax and corporate income tax liability.

2. Compliance with IRS Regulations

The IRS closely monitors business structures like S Corps to ensure reimbursements are handled correctly. An accountable plan helps you stay compliant with the IRS and Internal Revenue Code. Properly documenting expenses and reimbursements reduces the risk of audits or penalties.

3. Preserves Limited Liability Protection

S Corporation status provides limited liability protection, separating your personal assets from the business. Therefore, it’s crucial to keep business and personal finances separate. An accountable plan helps you draw a clear line between business reimbursements and personal expenses.

4. Simplifies Day-to-Day Operations

An accountable plan establishes a clear system for reimbursing business-related expenses. This simplifies your business’s financial processes, making it easier to manage company files, custom reports, and reconciliation reports in QuickBooks Online. Whether you’re dealing with recurring transactions or one-off transactions, having a streamlined reimbursement policy keeps everything organized.

5. Reduces the Risk of Tax Consequences

Incorrectly reimbursing yourself without an accountable plan can result in tax consequences. For instance, if reimbursements are considered wages, they’re subject to payroll taxes, Medicare taxes, and Social Security taxes. An example of an incorrect reimbursement is paying for a personal vehicle from your business account because you’re using it for your business. 

An accountable plan helps avoid these pitfalls by ensuring reimbursements are handled correctly for federal tax purposes.

How to Set Up an Accountable Plan for Your S Corp

Setting up an accountable plan for your S Corp involves a few straightforward steps. While your tax preparer should guide you through the specifics, here’s an overview to help you get started:

1. Create a Written Policy

Document your accountable plan in writing. Keep in mind that your tax advisor may have a template you can use. This policy should outline:

• Types of expenses eligible for reimbursement (e.g., travel, supplies, meals)
• The process for submitting expense reports and receipts
• Deadlines for submitting expenses and returning excess reimbursements

2. Require Detailed Records

The IRS requires substantiation for all reimbursements. This means employees and owners must provide detailed records, including:

• Receipts showing the amount, date, and description of the expense
• Mileage logs for vehicle expenses
• Notes explaining the business purpose of the expense

3. Reimburse Promptly

Reimbursements should be made within a reasonable time. The IRS generally considers 60 days to be reasonable. Prompt reimbursement ensures the expenses qualify as tax-free under the accountable plan.

4. Return Excess Amounts

If you receive more than the actual expense, the excess amount must be returned to the S Corp. This keeps the reimbursement tax-free and compliant with IRS rules.

5. Track Reimbursements in QuickBooks Online or Xero

Use QuickBooks Online or Xero to track your reimbursements and maintain accurate records. QuickBooks Online features like recurring transactions can help manage the reimbursement process efficiently. Record all reimbursements accurately in your company file.

Important Considerations for S Corp Owners

While an Accountable Plan helps S Corp owners manage expenses and reduce taxes, there are a few things to keep in mind:

• Consult a tax professional: Your tax preparer, CPA, or EA should advise you on setting up and maintaining an Accountable Plan. Florida Virtual Bookkeeper ™ can get your books tax-ready, but tax advice requires a qualified professional.
• Stay updated on tax laws: The IRS and the Internal Revenue Service occasionally update tax laws and rules for business entities. Staying informed ensures your S Corp remains compliant.
• Keep personal and business expenses separate: To preserve your limited liability company protection, avoid mixing personal income and business expenses. An accountable plan helps maintain this separation.

Conclusion

An accountable plan is a great way for S Corp owners to reimburse business expenses the right way. By ensuring reimbursements are tax-free, compliant, and well-documented, you can avoid tax consequences, maintain your S Corp status, and simplify your financial processes.

In conclusion, Florida Virtual Bookkeeper ™ specializes in keeping your books accurate and organized using QuickBooks Online and Xero, making your finances tax-ready for your CPA or tax preparer. By partnering with us, you ensure your business remains compliant and efficient, giving you more time to focus on growth. For personalized guidance on accountable plans, always consult a qualified tax professional to keep your S Corp running smoothly.