Posted Saturday, January 4, 2025

Here are some key takeaways-

• Purpose of an Accountable Plan: An Accountable Plan allows businesses to reimburse employees for business expenses without the reimbursements being considered taxable income by the IRS.

• Types of Expenses: The deployment of an IRS Accountable Plan categorizes expenses into three types:

100% Business Expenses: These should be paid directly by the business (e.g., business meals, advertising).
100% Personal Expenses: These should be paid by the individual and not reimbursed by the business (e.g., gym memberships, personal subscriptions).
Mixed Use Expenses: These should be paid personally and then reimbursed by the business based on the business-use percentage (e.g., cell phone, internet).

• Common Reimbursable Expenses: Some of the most common mixed-use expenses include:

Home Office: Reimbursement based on the percentage of the home used for business purposes (e.g., mortgage interest, utilities).
Cell Phones and Internet: Business-use percentages should be reasonable, with documentation to support the chosen split between personal and business use.
Mileage: If a personal car is used for business, the business can reimburse for mileage or a percentage of the car’s operating costs.

• Tax Benefits: Implementing an Accountable Plan reduces taxable business profits but does not add to taxable income to those reimbursed.

• Compliance: Proper documentation and adherence to the plan are essential to ensure compliance with IRS regulations. This includes maintaining detailed records of expenses and reimbursements.

• Ease of Implementation: Setting up an Accountable Plan is straightforward and reimbursements are commonly handled by reclassifying shareholder distributions.

What’s the big deal? The big deal is that the IRS considers any reimbursement to be taxable income unless a proper Accountable Reimbursement Plan is adopted and implemented.

Also, the days of deducting these employee business expenses on Form 2106 are gone after the Tax Cuts and Jobs Act of 2017.  As such, an Accountable Plan is needed now more than ever.

When discussing Accountable Plan stuff, there are three general expense types.

100% Business

The expenses that are 100% business such as copy paper, business meals, advertising, etc. should be paid by the business directly. Sure, we leave room for the business owners who want to rack up miles on their personal credit card. This is bad for a handful of reasons; a) it makes record keeping a chore, b) it co-mingles money which the IRS cannot stand and c) it breaks down the arms-length perspective between you and your business which plaintiffs love when suing you. We know business owners who have two credit cards, and they are both linked to their United MileagePlus account (as an example); one for business in the business name, and the other for personal.

100% Personal

The expenses that are 100% personal such as gym memberships, haircuts, your HBO subscription, etc. should be paid by you, the person, and not you, the business owner. Yes, we all accidentally whip out the business credit card at the grocery store.  And, at times, the business owner will use whatever checking account has the most money in it. Don’t do it! Fire up your phone, move the money to your personal checking account as a distribution, and pay for those movie tickets yourself.

Mixed Use

Mixed use expenses must always be paid personally, and then reimbursed by the business on a pro-rated or business-use percentage. Think of yourself working for Google, and they ask you to be on call during the weekends and drive your car to pick up pencils; Google wouldn’t pay for your cell phone or car directly, but they would reimburse you for the portion of your miles and cell phone that are considered Google-related.

Therefore, only business expenses that you paid for personally should be listed on the Accountable Plan Worksheet and Reimbursement form. This distinction has proven to be problematic in the past. Contact us with questions.

We’ll talk about the big four expenses next!

When discussing the primary mixed use (personal and business), these are the four most common.

Home Office Reimbursement

The home office reimbursement is commonly done using square footage. Your house is 2,500 square feet, your office is a 12 x 12 room and as such represents 5.8% (144 / 2,500) of your home. This percentage is then applied to your mortgage interest and property taxes (or monthly rent should you rent), utilities, maintenance, repairs, etc. becomes an Accountable Plan reimbursement. We have written several articles on home offices that discuss the 50-mile rule, depreciation, safe harbor and some other interesting tidbits. Check them out here:

Cell Phone

Many business owners use their cell phone for business, but they also try to deduct 100% of the cell phone expenses as a business expense. This is a challenge if you only have one cell phone; the day you get a text from your spouse asking for milk and eggs on the way home from work, your cell phone is suddenly something less than 100%. The business use percentage frankly is a SWAG. The days of recording each phone call are luckily gone, but you still need to demonstrate why you chose 75% business use over 40% (for example). The key here is to be reasonable! You will get way more leniency with a number that appears reasonable.

Internet

Straightforward since it is handled similarly to your cell phone.

Mileage Expense Reimbursement

If you own your automobile personally but use it for your business from time to time, then you should reimburse yourself for the business use of the automobile. You can either do this using a mileage rate or a percentage of actual expenses. Most automobiles and light duty trucks will operate for much less than the mileage rate, and as such there is some tax arbitrage between your actual costs and the amount deducted on the business tax return as a reimbursement. Should you own your automobile as a business asset? We have written some great articles on this topic too!

We designed a fancy MS Excel spreadsheet where you can enter your mixed use expenses. We suggest detailing your expenses and reimburse yourself through your Accountable Plan once every quarter- it is good accounting to stay on top of this, and memories tend to fade. More importantly, it helps with tax planning.

It is unfortunately too common when a business owner tells us he or she is making $100,000 after expenses throughout the year, and then during tax preparation he or she tells us about a $20,000 Accountable Plan reimbursement. It creates a big refund, sure, but it is not good tax planning.

Like any spreadsheet, it is only meaningful to the spreadsheet designer. So, we’ve created directions on using our Accountable Plan Worksheet and Reimbursement template. If you hate it, please kindly let us know. If you like it, simply send donuts and we’ll receive the message. Pictures of donuts don’t count.

This is a sample of a completed Accountable Plan reimbursement form in Excel. It also shows our Simplified Biz Ops worksheet as well.

This is an Excel template where you can record your Accountable Plan reimbursements / expenses, plus all other expenses for tax return preparation.

This is an online digital form where you can submit your Accountable Plan reimbursements / expenses to us for synthesis into a tax return.

The Accountable Plan Template spreadsheet is now combined with our Income Statement template which is used primarily for gathering up your year-end tax information. We call this our Simplified Biz Ops worksheet or SBO for short. Check it out!

Sole proprietors including single-member LLC owners, and partners are allowed to deduct the federal per diem rate for meals. Lodging can only be deducted using the actual cost of lodging. Where are S corporations? You are not going to like this. Employees of corporations are eligible for per diem allowances, reimbursements and deductions unless this same employee owns more than 10% of the corporation.

This means that most S corporation shareholders are hosed, and can only deduct (or get reimbursed) for actual meal costs. IRS Revenue Procedure 2011-47 has this limitation and IRS Publication 463 Travel, Gift and Car Expenses states in part “A per diem allowance satisfies the adequate accounting requirements for the amount of your expenses only if…you are not related to your employer.”

You are related to your employer if-

• Your employer is your brother or sister, half-brother or half-sister, spouse, ancestor, or lineal descendant,

• Your employer is a corporation in which you own, directly or indirectly, more than 10% in value of the outstanding stock, or

• Certain relationships (such as grantor, fiduciary, or beneficiary) exist between you, a trust, and your employer

Therefore, the question becomes, if you are an LLC being taxed as an S corporation, are you a corporation where you own stock or an limited liability company where you own a membership interest. We believe these are one in the same in this context. Don’t fret. You can still deduct 50% of your meals when traveling; you just need to use actual expenses and not per diem allowances.

The most elegant way, and the way we and the IRS prefer, is that you write a check or a do a transfer from your business checking account to your personal checking account in the amount of the reimbursement. Think of you and your business as separate entities, since they truly are. If you worked for another business that you didn’t own, the business would write you a check for the amount of expenses you covered personally. Same thing here. The IRS Fringe Benefit Guide has some helpful information as well.

Another less elegant way is to re-classify owner or shareholder distributions as employee reimbursements. For example, let’s say you took out $20,000 over the quarter as distributions. But after completing the Accountable Plan Worksheet and Reimbursement form, the company owed you $5,000. We would make an entry to reflect the reimbursement, and your shareholder distributions would be re-classified as a $15,000 distribution and a $5,000 reimbursement. The reimbursement becomes a business expense and deduction, and is non-taxable to you.

To offer an accountable plan your business must comply with the following-

1. The expenses must have a business connection;
2. The expenses must be substantiated within a reasonable period; and
3. The employee must return any money not spent to the employer, also within a reasonable period.

If any of the three conditions isn’t met, the reimbursement arrangement is treated as a nonaccountable plan. In other words, the reimbursements are taxable compensation to the employee and subject to employment taxes.

#3 above is very unusual in your common S Corp Accountable Plan situation. If you ran a medical sales business, and you provided a stipend to your sales team each month, they would need to return the unused portion of the stipend in a reasonable time. As such, direct reimbursements or reclassifying shareholder distributions as partly reimbursements is what we call “after the fact” and as such #3 is a non-issue.

The section from our book has a great example including journal entries of how this works.

There are potential problems with multiple owners when balancing Accountable Plan reimbursements. Let’s say your home office is 250 square feet and your home is 2,500 square feet. That is 10% business use. But your partner lives in an apartment, and her business use percentage is 25%. But! You have a mortgage and property taxes, whereas your partner pays rent. How do we keep that equitable? Tough!

Similar to automobiles, we can establish a not-to-exceed reimbursement limit but doesn’t that hose the owner who has more expenses? It certainly does.

There is another solution where each owner operates an S corporation that provides management or other services to the primary entity. We refer to this as the Mothership Baby S Corp construct.

If you do not have an Accountable Plan and associated Corporate Meeting Minutes / Adoption, please let us know. We can draft the documents and provide consultation to answer questions for $250.

Accountable Plan Reimbursement forms must be retained along with the proper record keeping such as receipts, invoices, credit card statements, etc. including a record or log (such QuickBooks or Excel).

Did you want to chat about this? Do you have questions on how Accountable Plans work? Let’s chat!