Accountable Plan
An accountable plan is a formal employer reimbursement arrangement that allows businesses to repay employees for work-related expenses tax-free, making the reimbursements deductible to the business and non-taxable to the employee.
An accountable plan is one of the most underused tax strategies for small business owners. It allows your business to reimburse you (the employee-owner) for business expenses without the reimbursement being treated as taxable income. The business gets a deduction, and you don't pay taxes on the money.
To qualify as an accountable plan, three requirements must be met: the expenses must have a business connection, the employee must substantiate expenses within 60 days, and any excess reimbursements must be returned within 120 days.
Common reimbursable expenses include: home office costs, cell phone and internet (business percentage), vehicle mileage, professional development, tools and supplies, travel expenses, and even health insurance premiums in some cases.
For S-Corp owners, an accountable plan is especially valuable because these reimbursements reduce W-2 wages, which lowers payroll taxes. Without an accountable plan, business expenses reimbursed to an employee-owner may be treated as additional compensation.
Setting up an accountable plan is straightforward — you adopt a written plan, document expenses with receipts, and process reimbursements through your business. No IRS filing is required to establish one.
Practical Example
An S-Corp owner has $12,000 in annual business expenses (cell phone, internet, home office, mileage). With an accountable plan, the business reimburses these tax-free. Without one, these would need to be paid from after-tax income. At a 30% combined tax rate, the accountable plan saves $3,600 per year.