What Is an Accountable Plan for S Corp?

An accountable plan provides a structured method for businesses to reimburse employees for legitimate business expenses. This arrangement ensures that reimbursements are not considered taxable income for employees, offering a financial benefit to both the employee and the employer. For S Corporations, an accountable plan is a valuable tool, allowing the company to deduct these reimbursements as business expenses while enabling shareholder-employees to receive tax-free payments for costs incurred on the company’s behalf. This mechanism helps manage business finances efficiently and ensures compliance with tax regulations regarding employee compensation and deductions.

Core Requirements of an Accountable Plan

For an expense reimbursement arrangement to qualify as an accountable plan under Internal Revenue Service (IRS) regulations, it must satisfy three fundamental requirements. These criteria ensure the legitimacy of the reimbursed expenses and prevent them from being treated as taxable wages. Adherence to these rules is essential for both the S Corporation and its employees to realize the tax benefits.

First, expenses must have a clear business connection, meaning they were incurred while performing services for the employer. Only costs directly related to the S Corporation’s operations are reimbursed. Personal expenses do not qualify. (Treasury Regulation 1.62-2)

Second, employees must adequately substantiate these expenses to the employer within a reasonable period. Substantiation involves providing detailed records, such as receipts, that document the amount, time, place, and business purpose of the expense.

Third, employees must return any excess reimbursements to the employer within a reasonable period. If excess amounts are not returned, the entire reimbursement may be reclassified as taxable income.

Establishing a Formal Accountable Plan

Setting up an accountable plan requires establishing a formal framework that complies with IRS guidelines. This phase ensures the plan’s legitimacy and provides clear operational procedures. A well-structured plan helps prevent misclassification of reimbursements and potential tax issues.

A foundational step is to develop a written policy document outlining the plan’s specific rules. This policy should detail the types of expenses eligible for reimbursement, required substantiation procedures, and the timeline for submitting expense reports. It must also clearly state the process for employees to return any excess reimbursements received.

Once the policy is drafted, communicating the plan to all employees is necessary. Employees must understand their responsibilities regarding expense submission and documentation. This can involve training, meetings, or dedicated resources.

It is beneficial to have employees acknowledge and agree to the terms of the accountable plan. This can be achieved through a signed agreement or acknowledgment form, confirming employees understand their obligations. This documentation provides a record for internal controls and potential audits.

Finally, the S Corporation needs to establish internal accounting and administrative processes to manage the plan. This includes setting up systems for receiving and reviewing expense reports, tracking reimbursements, and monitoring the return of excess funds. These processes ensure consistent application of the plan’s rules and accurate records.

Managing Expense Reimbursements

Once an accountable plan is formally established, its ongoing management focuses on processing and overseeing expense reimbursements. This involves a continuous cycle of employee submissions, employer reviews, and timely payments, all while maintaining meticulous records. The efficiency of these procedures impacts the plan’s effectiveness.

Employees initiate the process by submitting their expense reports. These submissions must include all required substantiation, such as receipts and detailed explanations of the business purpose for each expense. Adhering to the established timeline for submission maintains the accountable nature of the reimbursement.

The S Corporation then reviews submitted expense reports. This review ensures each expense meets established criteria, including a clear business connection and adequate documentation. Approving only legitimate and properly substantiated expenses is an important control measure within the accountable plan.

Upon approval, the S Corporation proceeds with timely reimbursement of approved expenses. This step completes the reimbursement cycle for valid costs incurred. Consistent and prompt reimbursement helps maintain employee satisfaction and encourages adherence to the plan’s procedures.

Managing excess advances is another ongoing aspect. If an employee received an upfront payment that exceeded actual substantiated costs, the process for returning the surplus must be followed. The S Corporation tracks these amounts and ensures their return to avoid reclassification as taxable income. Maintaining meticulous records of all expense reports, supporting documentation, reimbursements, and returned excess amounts is important for audit preparedness and financial transparency.

Common Reimbursable Business Expenses

An accountable plan allows for the reimbursement of a wide range of legitimate business expenses incurred by employees on behalf of the S Corporation. Understanding common categories of reimbursable expenses helps both employers and employees navigate the plan effectively.

Travel expenses frequently qualify for reimbursement, including costs for mileage, airfare, and lodging for business purposes. Meals during business travel are also reimbursable, subject to a 50% deductibility limit for the company.

Office-related expenses are another common category. This includes the cost of office supplies, internet, and phone services for business operations. For shareholder-employees with a qualifying home office, a portion of home-related expenses like rent, utilities, and insurance can also be reimbursed through an accountable plan.

Professional development costs, such as expenses for continuing education, seminars relevant to the business, and professional association dues, are often reimbursable. These investments contribute to an employee’s skills and knowledge, benefiting the S Corporation’s operations.

While many business expenses are reimbursable, current rules regarding entertainment expenses should be noted. Most entertainment expenses, such as tickets to sporting events or concerts, are not deductible by the company. However, meals associated with business discussions remain 50% deductible. Even if a company cannot deduct the entertainment portion, the cost can still be reimbursed to the employee under an accountable plan if it meets the business connection and substantiation rules.