Accountable Plan

What is an accountable plan?

An accountable plan is a written employer policy for reimbursing business expenses so that reimbursements are not treated as taxable wages. Under it, the firm deducts the expense, and the employee or owner receives the money tax free. Without one, reimbursements become compensation subject to payroll tax. For S corporation owners who pay business costs personally, an accountable plan is the cleanest way to get repaid.

The three requirements

Expenses must have a business connection, be substantiated with receipts and documentation within a reasonable period, and any excess advance must be returned. Miss any of the three and the payment is wages. Substantiation means the amount, date, place, and business purpose, not just a credit card charge. A written policy adopted by the company, with a simple expense report process, satisfies the structure.

Why S corporation owners rely on it

Owners cannot deduct unreimbursed business expenses on their personal returns, so a cost paid personally and never reimbursed is simply lost. The accountable plan moves the deduction to the entity where it belongs. It is the correct mechanism for home office costs, personal vehicle mileage, cell phone use, and professional dues the owner pays directly. Set it up before the expenses pile up, since reimbursing a prior year is messy.