February 11, 2022
Accountable Plan Basics for S Corporations
The S Corporation Accountable Plan – A Reimbursement Plan for the Business Use of your Personal Assets & Services
Please note that if you do not have an S Corporation election this article does NOT pertain to you.
As a business owner, it’s inevitable that lines between business and personal are often a little blurry. In some cases, things you need for both business and personal use overlap and it doesn’t make sense to have separate assets, workspace, vehicles, etc.
You are allowed to reimburse yourself from your business for things you pay for personally. As an S Corporation owner you are BOTH an employee and a shareholder. The reimbursements are subject to substantiation rules and regulations, but the tax benefits far outweigh the compliance tasks to reap the benefits.
While there is not an all inclusive list of the potential write offs in this, there are four primary and most typical reimbursements for S Corporation owners. Keep in mind, an accountable plan can extend to other company employees as well giving an opportunity for benefits. Please ask us if you’d like to know/understand more!
The “Big Four” Reimbursement Areas Are:
- Cell Phone
- Auto Expenses OR Mileage
- Home Office – Business Use of Home
That sounds great, what’s the catch?
Heh, there is always a catch, right? So the IRS considers that any reimbursement is to be treated as taxable income unless a proper Accountable Plan is in place by being properly documented, adopted and implemented. This method that is unique to corporations (both S and C) for business owners is vastly different than when your business was “just” an LLC or Sole proprietorship.
When we are considering business expenses and compliance treatment there are 3 main “buckets” they can be generally categorized in:
Advertising, copy paper, rent for the storefront, payroll, etc. are all clear cut examples of items that are fully intended for business purposes. They should be paid for directly by the business ideally. Sometimes, as a business owner you may grab something and pay for it with personal funds, the business should reimburse you for that exact amount. Ideally, run two transactions at the store. One that only has the business items to be reimbursed for the cleanest audit proof records that show you are not trying to co-mingle funds.
Expenses that are 100% personal should be paid by you, the person from your personal bank accounts, not ever by the business. Having the business regularly pay for your personal expenses, even if they get classified correctly as distributions in your accounting, is considered co-mingling and can “pierce the corporate veil”. This can thereby threaten the legal protections that your entity was set up to help create. It creates a nightmare in an audit examination and is just never a good idea. Sometimes things happen, occasional errors that are treated correctly are understandable and sometimes even unavoidable, but having the business pay for personal items on a regular basis is a recipe for disaster in the long run.
Mixed use expenses should always be paid from your personal funds and then reimbursed by the business on a pro-rata basis based on the business use percentage.
The Accountable Plan Reimbursement Worksheet should ONLY contain items that you paid for personally, and need to be reimbursed by the business for. Do NOT include any items that the business has already paid for directly. If you have items that the business paid, and need to be prorated for the personal portion please contact us for further instructions.
Let’s briefly touch on each of the most common reimbursement areas:
Cell Phone & Internet
Many business owners use their cell phones for business and assume/try to deduct 100% as a business expense. This is just not a good idea if you only have one phone. The moment your spouse sends a text to pick up milk on the way home, it’s now mixed business and personal use and certainly not 100% business. Additionally, your spouse’s cell phone, kid’s, etc. have no business purpose, so having the business pay the family’s entire cell phone bill is also not advised and could ultimately cause an unfortunate outcome if subject to examination by any of the tax authorities.
You are going to want to carve out the business use percentage versus the personal usage, as well as, your separate charges on your monthly phone bill. The business use percentage needs to also appear reasonable. While you no longer need to track each call and text to arrive at a business percentage, you should be ready to substantially prove why, for example, you chose 80% business use versus 40% if asked.
Internet is handled similarly to your cell phone, and it should be reasonable. If your family uses the internet for streaming, school, and online shopping, and you use it to do your administrative work in the evenings and weekends, then even claiming 50% use would not likely be considered reasonable. Again, you will want to explain and ideally document how you arrived at your percentage. Keep in mind, it can also change year to year if/when your circumstances change. Think back to COVID and suddenly you had to work from home full time for a while. Now it might be more reasonable that internet use is 50-50 because you need it for business use just as much as personal use.
Our tool allows you to choose the business use percentage each month so you can account for changes in circumstances. Just leave yourself notes (right in the tool) in case you need to be reminded of why you made changes later on.
If you own your automobile personally, but use it for business you should definitely reimburse yourself for the business use of your vehicle. You can use either mileage OR actual expenses as the basis for your reimbursement. Mileage is typically recommended as most vehicles and light duty trucks operate at less cost than the mileage reimbursement rate. The mileage reimbursement rate is intended to include not just gas, oil changes, etc., but it also considers depreciation and wear and tear on regular maintenance items such as tires and brakes.
In the end, mileage is also the best way to go about determining the business versus personal percentage of use. It’s an objective measurement that is easily explained and to substantiate proof in an examination. You can track both actual expenses and mileage and then determine at year end which method is most beneficial as long as your company accountable plan allows for this. You need to adopt a single method for the entire year however, not change method month by month. Our tool is set up to track mileage and mileage reimbursement. We’ve also added a page where you can track monthly actual expenses.
If at year end, we determine that it’s more tax beneficial to take actual expenses we can make that adjustment and help you save more in tax! It’s a good idea for at least one year to track both and know which outcome is the biggest benefit to you. Also, when you get a new vehicle, plan to track both for at least one year so you can be certain which method is best for you.
Home Office- Business Use of Home
Most commonly, the business use of home reimbursement is determined using square footage. It’s an objective measurement that is easy to explain if there is an inquiry.
Overview goes like this: You have a 2,000 square foot home. Your home office is in one of the 10×10 bedrooms, so 100 square feet. 100/2000 = 5%. Now 5% of your mortgage interest, property tax, homeowners’ insurance, utilities, repairs and maintenance, etc. becomes an accountable plan reimbursement.
This is the most common scenario and method. It may be more complex if for instance your business uses garage space, or an out building on your property. We will have to work with you on those details to determine the correct percentage of business versus personal use for the accountable plan reimbursement.
The tracking tool is set up to have the company reimburse you for all of these items on a monthly basis, which is technically the correct method for a compliantly managed accountable plan.
How to Handle the Reimbursement
The best practice is to complete the monthly reimbursement tool and write yourself a reimbursement check for that exact amount each month. If reimbursing yourself monthly feels like too much for you, the next best option would be quarterly. To do this – complete the monthly worksheets every three months and then reimburse yourself for the total of the 3 months.
A less desirable method, but it still works is to reclassify your distributions in your accounting ledger from shareholder distribution to a reimbursement, this is done via journal entry. Your bookkeeper should be able to help you with this if you are unsure how.
There are other expenses that may fall under an accountable plan reimbursement, this is not an all inclusive list. These are the most common that we’ve covered here. If you believe you have other situations that may qualify to be considered for your situation, please contact us to discuss and review your unique circumstance.