S Corp Accountable Plans
Sometimes you need to buy something for your business, but you’ve forgotten your business credit card at home, or some other reason prevents you from using your business accounts. So, you purchase what you need with cash, or with a personal card. How do you now get that expense into your business so it is deducted properly? The answer is different, and more complicated and formalized, with an S Corp as opposed to other entity types. The way you handle it in an S Corp is with an Accountable Plan.
An Accountable Plan is basically a formal reimbursement arrangement. You tell the company about the expense, and the company reimburses you. The reimbursement is deductible by the business and does not become taxable income to the person reimbursed.
It’s important that the plan is formalized (a simple document created and saved to your computer outlining the basics shown on this page is usually sufficient) and that the spending qualifies.
To qualify the spending has to meet three tests:
The expenditures must have a business connection or business purpose.
The employee must adequately account to their employer for all expenses within a reasonable period of time. This means submitting receipts/checks, etc to the business, within some regular time frame. One a month is best.
The employee must return any excess reimbursement or allowance (also known as an excess advance) within a reasonable period of time. So if the company reimburses you and then the item is refunded, or for some reason you wind up with more money from the reimbursement than you spent, you must return the excess to the company.
Here are some major categories of expenses that show up in Accountable Plans:
Out of Pocket Spending
This is pretty straight forward. You bought a hammer for the business but used a personal card. Save the receipt, give it to the business, along with a business purpose (tools/supplies) and date. The business writes you a check. The business classifies the check in their bookkeeping as Small Tools, or wherever you usually classify hammers. You/the employee deposit the check, it’s not income to you.
Sometimes you the owner are sort of wearing every hat for the business. In this case you take the receipt and save it in a folder in your business files called Accountable Plan. This is your proof that the reimbursement was a legitimate business expense and that you have a functioning accountable plan.
Mileage
If your business reimburses mileage the employee or owner must track the business mileage, as well as the purpose of the mileage. Then, submit that report to the business showing the miles driven, the date, and why they were driven. The business then writes you a check for the miles driven * the current IRS Mileage Reimbursement Rate which changes once or twice a year, look up the current one and use it.
Home Office Expenses
Decide as a business what home office expenses are reimbursed, and then track your spending and have the business reimburse you for the home office spending. See https://delaney.cpa/complicated-deductions for more on home office deductions.
Timing
Don’t wait until the end of the year for these reimbursements, do it monthly or at the latest quarterly. Accountable Plans should look and function the way they would if you were dealing with a fully separate employee. Would that employee wait 12 months to get reimbursed for something they spent on the business? Unlikely. So, submit your expenses to the Accountable Plan monthly and have the business write out reimbursement checks monthly.