According to an article in the Journal of Accountancy, employees, including business owners/employees, frequently pay expenses out of pocket for their employer or business. Typically, they either anticipate reimbursement or, until the end of 2017, had planned to claim these expenditures as a miscellaneous itemized deduction (subject to a threshold of 2% of adjusted gross income (AGI)). Before the Tax Cuts and Jobs Act (TCJA) you could deduct unreimbursed employee expenses paid with personal funds on Schedule A of your personal income tax return. However, the TCJA eliminated this miscellaneous itemized deduction, prompting self-employed workers to seek new reimbursement arrangements.
Efficient expense and tax management is vital for S-corporation owners and small business operators. The accountable plan serves as a critical tool in this effort. This article explores the concept of accountable plans for S-corporation owners, highlighting their advantages and providing guidance on implementation.
What is an Accountable Plan?
An accountable plan is a reimbursement or allowance arrangement that enables employers to reimburse employees for business expenses incurred during their duties. Accountable plans must follow IRS requirements. For S Corporation owners, this involves establishing a structured system to reimburse themselves and their employees for business-related expenses.
An accountable plan is a framework for tax-free employer reimbursements to employees. To qualify, it must meet three criteria:
- Business connection for expenses
- Documented evidence of expenses
- Timely return of excess funds
When these requirements are met, reimbursements are not reported as taxable wages on W-2 forms, offering tax benefits to both employer and employee.
A typical example is recreating the annual home office deduction that LLC owners typically claim. With an S Corp, this deduction must be claimed differently.
Benefits of an Accountable Plan for S Corp Owners
S Corporation owners occupy a unique position as both employers and employees. Without an accountable plan, expense reimbursements to the owner-employee increase wages, leading to a complex tax situation. While this reduces the company’s gross business revenue, it simultaneously increases the owner’s personal taxable income, resulting in higher income tax obligations. Furthermore, it raises Social Security and Medicare tax liabilities. The situation is compounded by following the 2017 Tax Cuts and Jobs Act (TCJA); owners can no longer claim deductions for unreimbursed job-related expenses on their personal tax returns. This includes expenses such as local business transportation and away-from-home travel expenses. This change particularly impacts many expatriate business owners who opt for the standard deduction rather than itemizing. Consequently, there needs to be an accountable plan to avoid increased tax burdens for S Corp owners at both the business and personal levels.
Tax Savings: An accountable plan offers significant tax efficiency. By accurately documenting and reimbursing business expenses, S-corp owners can deduct these expenses from corporate income, thereby reducing overall tax liability. The plan shifts business expense deductions to the company. Allows for legitimate business expense write-offs.
Deducting shared expenses: Some expenses—your home office, cell phone, internet, and auto expenses—might be split between personal and business use. As an S-corp owner, the only way to (legally) deduct the business portion of these expenses is an accountable plan.
Employee experience: In the work-from-home age, it’s a perk to be able to reimburse your remote employees for their home office expenses. It’s a deduction for you and tax-free income for them.
Compliance: Adhering to an accountable plan ensures compliance with IRS regulations. Proper documentation and following guidelines demonstrate transparency and accountability, reducing the risk of audits and penalties. Maintaining a paper trail is crucial, as it is much easier to point to existing records during an audit than to recreate a year’s worth of documentation.
Expenses Eligible for Inclusion in an Accountable Plan
An accountable plan can encompass a wide range of employee-related expenses, such as:
- Travel costs (including meals and per-diem rates for lodging and incidentals)
- Business entertainment
- Equipment and tool purchases
- Subscription fees
- Professional membership dues
- Marketing and advertising expenses
- Internet costs
- Education, training, and development expenses
- Home office expenses (subject to standard rules)
- Coworking space fees
- Foreign exchange fees
This comprehensive list allows businesses to effectively manage and reimburse various legitimate business expenses through their accountable plan.
Establishing an Accountable Plan: Key Steps
- Review IRS Guidelines:
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- Study IRS regulations on accountable plans
- Consult the IRS Fringe Benefits Guide for a foundational understanding
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- Create a Plan Document:
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- Draft a written policy outlining terms, conditions, and reimbursement procedures
- Clearly define documentation requirements
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- Employee Education:
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- Train all employees, including S Corp owners, on plan details and responsibilities
- Emphasize proper expense reporting to maximize tax savings
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- Implement and Monitor:
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- Put the plan into action
- Regularly review expense reports and processes
- For solo S Corps, this process may be simplified
Proper establishment and management of an accountable plan ensure compliance and optimize tax benefits for S Corp owners and employees.
Conclusion
Accountable plans offer S Corp owners a flexible way to reimburse themselves for business expenses paid using personal money. An accountable plan allows businesses to make reimbursements in a way that benefits both employees and the employer. If you have any questions feel free to reach out to Huckabee CPA for a free consultation to ensure you’re maximizing the benefits of your accountable plan.