Posted Sunday, November 26, 2023
We encourage businesses to implement an Accountable Plan which allows employee owners to turn in expense reports for the business use of personal assets. We’ll run through some of the common ones in a bit.
What’s the big deal? The big deal is that the IRS considers any reimbursement to be taxable income unless a proper Accountable Plan is adopted and implemented. This problem wasn’t terrible since you could also deduct employee business expenses on Form 2106 which was later a Schedule A itemized deduction. So, the reimbursement was deducted by the business, later considered taxable income to you but netted to zero once you deducted these same expenses on Form 2106. The deduction truly happened on the business tax return.
However, 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. An Accountable Plan is easy to do, is a great way to pull money out of the business and actually reduces the amount of taxes paid. A win-win scenario.
Three Types of Expenses
When discussing Accountable Plan stuff, there are three general expense types.
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.
The expenses that are 100% personal such as gym memberships, haircuts, Game of Thrones on HBO, 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. Be careful! 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 expenses should 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 would not pay for your cell phone or car directly, but they would reimburse you for the portion of your miles and cell phone that were 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!
The Big Four
When discussing the primary mixed use (personal and business), these are the four most common.
As you would expect, 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-
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.
Straightforward since it is handled similarly to your cell phone.
If you own your automobile personally but use it for your business, 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!
Accountable Plan Worksheet
We have designed a fancy MS Excel spreadsheet where you can enter your mixed use expenses. We suggest detailing your expenses and being reimbursed through your Accountable Plan once every quarter- it is good accounting to stay on top of this, and memories seem 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.
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!
Accountable Plan Reimbursements
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. And if you worked for another business that you did not own, the business would write you a check for the amount of expenses you paid personally. Same thing here.
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.
Our KB article has a great example including journal entries of how this works and our Accountable Plan instructions do as well.
Adoption and Record Keeping
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).