What Is an Accountable Plan and How Does It Work for S-Corp Owners?

An accountable plan is a formal expense reimbursement arrangement that allows an S-Corp to reimburse its shareholders and employees for legitimate business expenses on a tax-free basis. When structured properly under IRC Section 62(c) and Treasury Regulation Section 1.62-2, reimbursements paid through an accountable plan are excluded from the recipient's gross income, are not subject to payroll taxes, and are fully deductible by the S-Corp as ordinary business expenses under IRC Section 162.

The Three Requirements of an Accountable Plan

The IRS requires every accountable plan to satisfy three conditions outlined in Treasury Regulation Section 1.62-2(c). First, there must be a business connection -- the expense must be incurred in connection with the performance of services as an employee. Second, there must be adequate accounting -- the employee must substantiate the expense with receipts, invoices, or other documentation within a reasonable period (generally 60 days of incurring the expense). Third, any excess reimbursement must be returned -- if the employee receives an advance or reimbursement that exceeds the substantiated expense, the excess must be returned within a reasonable period (generally 120 days).

If any of these three requirements is not met, the entire reimbursement is treated as paid under a nonaccountable plan. Under a nonaccountable plan, reimbursements are included in the employee's W-2 wages and are subject to federal income tax, Social Security tax, Medicare tax, and any applicable state taxes. This is a costly outcome that can be avoided with proper plan design.

Why S-Corp Owners Need an Accountable Plan

S-Corp shareholder-employees face a unique challenge. Unlike sole proprietors who deduct business expenses directly on Schedule C, S-Corp shareholders cannot deduct unreimbursed employee business expenses on their personal returns. The Tax Cuts and Jobs Act of 2017 suspended the miscellaneous itemized deduction for unreimbursed employee expenses under IRC Section 67(a) through 2025. This means that without an accountable plan, an S-Corp shareholder-employee who pays for business expenses out of pocket gets no tax deduction at all.

An accountable plan solves this problem by shifting the deduction to the S-Corp. The corporation reimburses the shareholder-employee, deducts the reimbursement as a business expense, and the shareholder-employee receives the funds tax-free. The net effect is the same as if the shareholder had deducted the expense directly -- but the mechanism is through the corporate entity rather than the personal return.

Common Expenses Covered by an Accountable Plan

An accountable plan can reimburse a wide range of legitimate business expenses. These include home office expenses calculated using either the actual expense method or the simplified method under Revenue Procedure 2013-13, business use of a personal vehicle using the IRS standard mileage rate (currently 67 cents per mile for 2024), business travel including airfare, lodging, and meals (subject to the 50% limitation under IRC Section 274(n)), professional development and continuing education, business-related technology purchases such as computers, software, and peripherals, cell phone and internet service allocated to business use, and professional subscriptions and memberships.

How to Establish an Accountable Plan

Creating an accountable plan requires a written plan document adopted by the S-Corp's board of directors through a formal resolution. The plan document should specify which categories of expenses are eligible for reimbursement, the substantiation and timing requirements, the procedure for submitting expense reports, and the process for returning excess reimbursements. While the IRS does not require the plan to be filed with any agency, the written document must exist and be available for inspection if the corporation is audited.

Once the plan is adopted, the S-Corp should implement an expense reporting system. Each reimbursement request should include the date, amount, business purpose, and supporting documentation for every expense. The corporation reviews the submission, approves it, and issues payment from the business account. The reimbursement is recorded as an operating expense on the S-Corp's books -- not as wages or officer compensation.

Accountable Plan vs. Increased Salary

Some S-Corp owners simply increase their W-2 salary to cover business expenses they pay personally. This approach is inefficient because the increased salary is subject to payroll taxes -- 15.3% combined for Social Security and Medicare (up to the Social Security wage base), plus 2.9% Medicare on all wages, plus the 0.9% Additional Medicare Tax under IRC Section 3101(b)(2) for wages exceeding $200,000. An accountable plan reimbursement avoids all of these taxes. For an S-Corp owner who incurs $20,000 in annual business expenses, routing those through an accountable plan instead of salary can save $3,000 or more in payroll taxes annually.

An accountable plan is not optional for S-Corp owners who want to maximize their tax efficiency -- it is essential. AE Tax Advisors helps S-Corp owners design, document, and implement accountable plans that meet all IRS requirements while capturing every eligible deduction.

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This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional regarding your specific circumstances. AE Tax Advisors, 935 Lake Elmo Dr, Suite B, Billings, MT 59105. Phone: (631) 614-5762.