If you run your business through an S corporation or a C corporation, there is a good chance you are paying for business expenses personally and not getting a proper deduction for them. An accountable plan fixes that, and it is one of the few tax moves that is genuinely simple.
The problem it solves
You work from a home office. You drive your own car to client meetings. Your mobile phone is mostly business. Your home internet runs the business.
As a sole proprietor these flow onto Schedule C fairly directly. Once you incorporate, the picture changes. You and the corporation are separate. Expenses you paid personally are, on their face, personal expenses — and unreimbursed employee business expenses are not deductible on your individual return.
So the corporation gets no deduction because it did not pay, and you get no deduction because you are an employee. The expense simply disappears.
How an accountable plan works
An accountable plan is a written arrangement under which the company reimburses employees, including owner-employees, for business expenses. Done correctly:
- The company deducts the reimbursement as a business expense
- The reimbursement is not taxable income to you
- It is not subject to payroll tax
- It does not appear on your W-2
Money moves from the company to you, the company deducts it, and you are not taxed on receiving it.
The three requirements
1. Business connection
The expense must have a genuine business purpose. Your home office must be used for business. The mileage must be business mileage.
2. Substantiation
You must document the amount, date, place and business purpose within a reasonable time. For mileage that means a contemporaneous log, not a December reconstruction from your calendar.
3. Return of excess
Any advance exceeding actual substantiated expenses must be repaid within a reasonable period. This is why a flat monthly allowance with no accounting behind it is not an accountable plan — it is simply wages, taxable and reportable.
Miss any of the three and the whole payment converts to taxable compensation.
What typically runs through it
- Home office. The business-use percentage of mortgage interest or rent, utilities, insurance and maintenance
- Mileage. Business miles in a personally owned vehicle, at the standard rate or actual costs
- Mobile phone and internet. The business-use portion
- Travel, meals and lodging for business trips, subject to the usual limits
- Professional dues, subscriptions and continuing education
- Equipment purchased personally and used in the business
Why the home office piece matters more after incorporating
The home office deduction has a reputation for being an audit magnet. That reputation is largely outdated, but there is a real structural point for corporations.
Renting your home office to your own corporation creates rental income you have to report and can create complications on sale. Reimbursing yourself under an accountable plan generally avoids that, because a reimbursement is not rent.
Same money, materially different treatment.
Setting one up
The mechanics are modest:
- Adopt a written plan. A board resolution or written policy stating the company reimburses employees for substantiated business expenses.
- Build a submission process. A monthly or quarterly expense report with receipts and business purpose.
- Reimburse by separate payment. Not folded into payroll. A distinct transfer, coded to the right expense accounts.
- Keep the documentation. The reports and receipts are what make the treatment defensible.
The mistake that undoes it
Adopting the plan and then never running reimbursements through it.
We regularly see a well-drafted accountable plan in the corporate records and, in the books, twelve months of owner draws with no expense reports behind them. The plan does nothing on its own. The monthly discipline is the entire mechanism.
Pick a date, submit the report, make the payment, keep the receipts. It takes twenty minutes a month and it is one of the more reliable deductions available to an owner-employee.
Talk it through with a Fresno CPA
We set up accountable plans and run the reimbursements as part of the monthly close, so the documentation exists before anyone asks for it. Learn more about our business tax planning.
Schedule a meeting or call 559-372-9213.
This post is general information, not advice for your specific situation. Tax figures are current for the year stated and many are indexed annually. Talk to a CPA before acting on any of it.
