Pull Money Out of the S Corp, Accountable Plan
Posted November 23, 2018
One of the goals of any business owner is to be able to pull money out of the business without creating a taxable event. There are four big ways to accomplish this-
- Reimbursements for Out of Pockets Business Expenses (Accountable Plan).
- Fund Your Retirement Account.
- Reimbursements for Self-Employed Health Insurance Premiums, HSA Contributions and HRA Reimbursements.
- Paying for an Employee’s Education (kind of rare).
We encourage businesses to create an Accountable Plan which allows employees to turn in expense reports for home office use, mileage, cell phone, internet, meals and travel. All these expenses have one thing in common- they are mixed used, both personally and business. Mixed-use expenses should be paid by the employee and later reimbursed. Conversely, anything that is 100% business use should be paid directly by the business. The same thing, but in bullet form-
- 100% business- Paid by the business, from the business checking account.
- 100% personal- Paid by you, from your personal checking account.
- Mixed- Paid by you, and reimbursed by the business for the business portion.
Of course if you are reaping some huge cash back or travel deals with your personal credit card, then by all means charge the 100% business use items to your personal card and run those expenses through an Accountable Plan. Quick warning- the IRS and credit card businesses are butting heads over the rebate programs. It is an ascension of wealth and technically taxable income. Whoa! Yup, and the IRS would like 1099s to be issued to show the income. This will be battled for the next decade for sure.
Remember that as an S corporation owner, you are both a shareholder and an employee. Therefore, when you are being reimbursed you are being reimbursed as an employee and not as a shareholder.
Also recall that with the Tax Cuts & Jobs Act of 2017, unreimbursed employee expenses and anything else that was deductible subject to the 2% adjusted gross income limitation are gone after 2017. Therefore, some of this argument is moot and essentially makes deducting expenses at the corporate level and getting reimbursed all that more important… well, since it is the only option.
Make life easy, get an Accountable Plan. Make life even easier, have WCG (formerly Watson CPA Group) prepare this corporate document and the associated corporate governance documents (we charge about $150).
Another Side Note: The processing of an Accountable Plan can be done at the end of each quarter to basically 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 Reimbursement, the business 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 (taxable) and a $5,000 reimbursement (non-taxable).
The “look back” at the end of the quarter method might not work if you provide a stipend or some other advance to your employees throughout the period. This is due to the time limits imposed on the substantiation requests and returns of excess reimbursements. Try to avoid the advance or stipend approach.
We would prefer that employee reimbursements through an Accountable Plan be done as a single check or transfer from the business checking account into your personal checking account (as the employee). This makes the accounting very straightforward- you debit Employee Reimbursements and credit Cash. If you are using QuickBooks, you categorize the check or transfer as Employee Reimbursements with splits for each sub account.
Here is a sample journal entry for an S Corp shareholder who took out $20,000 as a shareholder distribution, but later re-categorized the transaction as distributions, wages and employee reimbursements.
|Owner Wage Expense||7,000|
When the original distribution took place, there was a debit to Shareholder Distributions for $20,000 and a credit to Cash for the same. We are simply reducing the $20,000 by $8,950 so the actual distribution reflects $20,000 less $8,950 or $11,050. No adjustment is made to Cash. Make sense?
If we were putting this transaction into the books together from the start, it would look this starting with the shareholder distribution-
And then the Owner Wage Expense and Employee Reimbursements-
|Owner Wage Expense||7,000|
Everything would end up in the same spot- Shareholder Distributions at $11,050, Owner Wage Expense at $7,000 and Employee Reimbursements at $1,950. Cash spent would be $20,000. The only difference is the first example is a correcting or reversing entry.
This is a slight over-simplification since there would also be a Payroll Tax Expense entry for the business’s portion of Social Security, Medicare, Unemployment, etc. but this should be illustrative enough.
An Accountable Plan is easy to do, is a great way to pull money out of the business and reduces the amount of taxes paid. Keep in mind too that by reducing your overall net business income you are also reducing one of the criteria for the reasonable salary testing, and this in turn possibly decreases your salary (and subsequent Social Security and Medicare taxes). A win-win scenario.
Accountable Plan Provisions, Requirements
The plan is usually drafted as a business policy and later adopted through Corporate Minutes, if your underlying entity is a corporation, and the plan satisfies three basic IRS requirements: a business connection; substantiation; and return of excess amounts-
The expense must have a business connection. Typically expenses incurred by an employee while doing his or her job usually have a business connection. It might be a good idea to list some examples of such as home office, cell phone, internet, mileage and meals. Health insurance premiums should also be detailed.
You could also list conditions and parameters for reimbursement. Must answer phone calls outside the office to claim reimbursement. Or only mileage to and from client meetings, delivering product, running errands for supplies, etc. The more comprehensive the allowable business connections, the safer your plan will be.
The employee must adequately account to the business for expenses within a reasonable time. Adequate accounting means completing expense reports and providing the business with receipts, invoices, and other documentary evidence of the expenses. Using a separate credit card and requesting credit card statements is a great recordkeeping technique.
There are special substantiation rules for meals, business gifts and anything considered “listed property.” We can help you these situations if necessary.
Return of the Excess Reimbursement
The employee must return to the business any excess reimbursements within a reasonable time. While this is not an issue if you are reimbursed only for what you request, you should still detail this policy in your Accountable Plan. Many businesses provide a monthly stipend to cover expenses, and employees are required to return unused portions.
Here is a timeline according to the IRS-
1. An advance may be received within 30 days of the time of the expense.
2. The employee furnishes an adequate account of expenses within 60 days after they were paid or incurred.
3. The employee returns any excess reimbursement within 120 days after it was paid or incurred.
The Accountable Plan should address the above issues, and it should be drafted as business policy for all employees. While different employee groups and individual employees can have different plans, you should draft this policy while distancing it from any favoritism towards the shareholder employees. WCG (formerly Watson CPA Group) can help draft this corporate governance document for $150. Plus we teach you how to use it. Bargain!
Meals pose an interesting scenario. They are 100% reimbursable to you, but only 50% deductible to the business. If you are an S Corp LLC then this 50% rule on meals increases your taxable income. Either way, the Accountable Plan is still the best option.
For a sample Accountable Plan reimbursement form that you can review please see-
The business should buy the desk, office furniture and equipment used in your business, even if you use a home office. The cool thing is if the business buys this stuff, it can take an instant Section 179 depreciation deduction for the full amount. If you buy it directly, you might have to depreciate it over time on your personal tax return.
S Corp Accountable Plan Recap
In summary (sounds like a bad college paper at 3:00AM)… in summary, an S corporation with an Accountable Plan offers a great degree of flexibility to provide several options to minimize tax consequences and maximize your family’s wealth. Some hassles, but manageable. We agree that it might not be simple and the rules can be onerous, so let WCG (formerly Watson CPA Group) consult with you to review the bulleted points and determine a path that fits.
Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
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