How an Accountable Plan Can Save Your S Corporation Big on Taxes
Many taxpayers hear that S Corporations are the best way to go because you can save a significant amount of money on taxes compared to a single-member LLC or sole proprietorship. And it’s true—an S Corp can offer substantial tax benefits by allowing business owners to avoid self-employment taxes on a portion of their income.
But here’s the catch: while the savings are real, many small business owners don’t fully understand the responsibilities of running an S Corporation or what it truly means to elect S Corp status.
When you elect to be taxed as an S Corp, you’re not just the business owner anymore—you’re also considered an employee of your company. This means you’re required to pay yourself a reasonable salary, report that salary through payroll, and withhold payroll taxes. On top of that, reimbursing yourself for business expenses becomes more complicated. If you’re not careful, your reimbursements could be classified as taxable income, cutting into the very savings you sought when you became an S Corp.
This is where the accountable plan becomes a game-changer.
What Exactly is an Accountable Plan?
An accountable plan is essentially a formal system your S Corp uses to reimburse employees (yes, including you) for legitimate business expenses. If you follow the IRS rules, these reimbursements aren’t treated as taxable income to you. Plus, the business gets to deduct them as expenses. It’s a win-win.
Without an accountable plan, every time you reimburse yourself for something like mileage, office supplies, or business meals, it’s considered taxable income. That means you’re paying income tax and payroll tax on money you’re already spending on the business. Doesn’t sound fair, does it?
With an accountable plan in place, you get reimbursed tax-free, and your business still gets the deduction. It’s one of those rare situations where you can have your cake and eat it too.
How an Accountable Plan Benefits You!
Imagine you use your personal car for business purposes, like meeting clients or running work-related errands. Let’s say 60% of your monthly mileage is for business and the remaining 40% is personal. Through an accountable plan, your company can reimburse you for 60% of your vehicle-related costs, such as gas or maintenance. That portion of the reimbursement is completely tax-free to you, while your business can deduct it as an expense.
It’s important to note, though, that the IRS closely monitors these arrangements. An accountable plan isn’t a way to sneak personal expenses through the business. To stay compliant, every reimbursed expense must have a legitimate business purpose and proper documentation, like mileage logs or receipts.
By using an accountable plan, you not only save money but also create a clear separation between personal and business expenses, which can protect you during an audit and streamline your record-keeping.
3 Keys Factors to Establishing an Accountable Plan
To qualify for reimbursement under an accountable plan, remember that you must pay for the expense personally first. Your business can then reimburse you.
The IRS requires that the plan meet three key criteria:
Business Connection: Expenses must have a direct business purpose, such as travel, meals, or supplies.
Substantiation: Employees must provide documentation, like receipts or mileage logs, to substantiate the expenses within a reasonable time.
Return of Excess Payments: If the company advances funds for expenses, employees must return any unused amounts.
When to Use an Accountable Plan (and When Not To)
If you have a 100% business expense—like advertising or office supplies—there’s no need to create an accountable plan for that. You can simply write it off as a business expense. However, you could set up an accountable plan for these types of expenses if you prefer, but it’s not necessary in my opinion.
The real benefit of an accountable plan is when you have expenses that are shared between business and personal use. For example, with a cell phone or car, where only part of the usage is business-related, you can reimburse yourself for the business portion tax-free. By using an accountable plan for these mixed-use expenses, you ensure that you're reimbursed for the business portion while avoiding the extra taxes and paperwork that would come from treating them as taxable income.
Expenses You Can Be Reimbursed For Under an Accountable Plan
Home office expenses (portion of rent, utilities, etc.)
Car mileage (business-related portion)
Business meals and entertainment
Travel expenses (airfare, lodging, meals, transportation)
Training and education related to your business
Cell phone usage (business-related portion)
Office supplies
Business-related subscriptions or memberships
Professional licenses or certifications
Software and tools used for business purposes
How To Set Up an Accountable Plan For Your Company
If you’ve read this far, you’re probably thinking, “Christina, how do I set up an accountable plan for my company?” Well, I’m here to tell you—it’s actually quite simple! While it's not required to have a written plan in place, I strongly recommend you do. Why? Because if you're ever selected for an audit, the IRS loves to see documentation for everything business-related. Having a written plan not only ensures you stay compliant but also makes life a lot easier in the long run.
The great news is Divine Financial Services can provide you with an example of a written plan to check out. But here’s what your accountable plan should include. There are four key factors that will help guide you:
What is and isn’t reimbursable under the plan – Clearly define which expenses are eligible for reimbursement (e.g., travel, meals, car mileage) and which ones aren’t (e.g., personal expenses).
Protocols for documenting expenses and substantiation – This includes what types of documentation you need to keep (receipts, logs, invoices) and how to track and organize these expenses.
How soon expenses should be submitted after they are incurred or paid – Set a reasonable timeline for when employees or owners should submit their expenses (e.g., within 30 days of incurring the expense).
When employees can expect reimbursement after expense submissions are received – Outline how long it will take for reimbursements to be processed once the expenses have been submitted (e.g., within 10 business days).
The Bottom Line
If you’re running an S Corp and you don’t have an accountable plan, you’re leaving money on the table. With a simple policy in place, you can turn taxable income into tax-free reimbursements, save on payroll taxes, and keep your business compliant with IRS rules.
Running an S Corporation can feel overwhelming, but strategies like an accountable plan simplify things while maximizing your tax savings. If you’re not sure where to start, reach out—I’d be happy to help you get set up and start saving!
