As a small business owner, especially if you operate as an S Corporation, managing expenses and taxes efficiently is crucial. One valuable tool in this regard is the accountable plan. In this blog post, we'll delve into what an accountable plan entails for S Corp owners, its benefits, and how to establish on
An accountable plan is a reimbursement or allowance arrangement that allows employers to reimburse employees for business expenses incurred in the course of their duties. For S Corporation owners, this means creating a structured system to reimburse themselves and their employees for business expenses.
A common example is essentially recreating the home office deduction LLC owners may have been accustomed to claiming each year. With an S Corp, this deduction must be claimed in a different way.
Tax Savings: One of the primary benefits of an accountable plan is its tax efficiency. By properly documenting and reimbursing business expenses, S Corp owners can deduct these expenses from the corporate income, reducing overall tax liability.
Compliance: Following an accountable plan ensures compliance with IRS regulations. Proper documentation and adherence to guidelines demonstrate transparency and accountability - hence the name, reducing the risk of audits and penalties. It will also give you a paper trail to point to in the case of an audit. It’s much more difficult to recreate a year’s records than it is to maintain them.
Expense Reimbursement Policy: Define the types of expenses eligible for reimbursement under the plan. These may include travel, meals, entertainment, office supplies, home office reimbursements, mileage reimbursements, phone and internet, etc. Clearly outline any restrictions or limitations.
Documentation Requirements: Establish procedures for documenting expenses. This typically involves keeping receipts, invoices, and other relevant records to support reimbursement claims. Emphasize the importance of timely and accurate record-keeping.
Reimbursement Process: Outline the process for submitting reimbursement requests and receiving payments. Specify who is responsible for approving expenses and the timeline for reimbursement.
Accountability Standards: Stress the importance of adherence to the plan's guidelines and policies. Reinforce the need for honesty and integrity in expense reporting to maintain the plan's credibility.
Review IRS Guidelines: Familiarize yourself with IRS regulations regarding accountable plans. Ensure that your plan complies with these guidelines to qualify for tax benefits. I would encourage people to take a look at their Fringe Benefits Guide to start to get an understanding.
Draft a Plan Document: Prepare a written document outlining the terms and conditions of the accountable plan. Clearly explain the reimbursement policy, documentation requirements, and other relevant details.
Employee Training: Educate employees, including yourself as the S Corp owner, about the accountable plan and their responsibilities under it. Provide training on proper expense reporting procedures and the importance of compliance. Poor record keeping and reporting could cost you thousands of dollars in tax savings.
Implementation and Monitoring: Put the accountable plan into action and monitor its effectiveness. Regularly review expense reports, documentation, and reimbursement processes to identify any issues or areas for improvement. This may not require much work if you’re the only employee.
Many tax professionals mirror the forms for the home office deduction and the vehicle mileage deduction worksheet for guidance when creating their accountable plans.
On top of that, they may include things like cell phone, internet, travel/meals, and other job related expenses.
Keep detailed notes of what you bought/paid for, and when. Make sure you keep these notes as evidence for your reimbursements that you’ll issue in accordance with the plan you’ve drafted.
Disclaimer: none of this should be seen as advice. This is all for educational purposes. Consult your legal, tax, and financial advisor before implementing any changes to your plan.
Financial Advisor