Maximizing S Corporation Deductions: The Power of Accountable Plans

As an S Corporation owner, you're always looking for ways to maximize your tax deductions while staying compliant with IRS regulations. One powerful tool at your disposal is the "accountable plan." In this article, we'll explore how accountable plans can benefit your S Corporation and what happens if you don't have one in place.

What is an Accountable Plan?

An accountable plan is a formal arrangement that allows your S Corporation to reimburse employees (including shareholder-employees) for legitimate business expenses. These reimbursements are not considered taxable income for the employee and are fully deductible by the corporation. To qualify as an accountable plan under IRS rules, the arrangement must meet three criteria:

1. Business Connection: Expenses must be directly related to the business.

2. Substantiation: Employees must provide receipts, invoices, or other documentation to prove the expense.

3. Return of Excess Payments: If the reimbursement exceeds the actual expense, the employee must return the excess amount promptly.

Deductions Allowed Under an Accountable Plan

With a properly implemented accountable plan, your S Corporation can deduct the following types of expenses:

1. Mileage for business-related travel using a personal vehicle

2. Meals and entertainment expenses (subject to IRS limits)

3. Home office expenses, including a portion of rent or mortgage interest, utilities, and maintenance costs

4. Supplies purchased for business purposes

5. Internet and phone costs used for business

6. Travel expenses such as airfare and hotel stays

7. Continuing education or professional development costs

8. Costs associated with attending conferences or seminars

Benefits of Using an Accountable Plan

1. Tax-Free Reimbursements: Reimbursements under an accountable plan are not taxable income for employees.

2. Increased Deductions: The S Corporation can deduct all reimbursed amounts as legitimate business expenses.

3. Avoid Payroll Taxes: Since reimbursements are not considered wages, they are exempt from Social Security, Medicare, and unemployment taxes.

4. Compliance with IRS Rules: A properly implemented accountable plan ensures compliance with IRS regulations and reduces audit risks.

What Happens Without an Accountable Plan?

If your S Corporation doesn't have an accountable plan in place and still takes deductions for expenses like home office use, several issues can arise:

1. Disallowed Deductions: The IRS may disallow many of the deductions taken by the S Corporation, especially if they're considered personal rather than business-related or lack proper documentation.

2. Reclassification of Payments: Any payments or reimbursements made to employees might be reclassified as wages subject to employment taxes, dividends, or additional compensation. This can result in increased taxable income for the employee and additional payroll taxes for both the corporation and the employee.

3. Increased Audit Risk: Taking substantial deductions without a proper accountable plan can increase the likelihood of an IRS audit.

4. Double Taxation: If the IRS reclassifies deductions as dividends, it could lead to double taxation where the corporation loses the deduction and the shareholder-employee must report the dividend as income.

5. Loss of Home Office Deduction: S Corporations cannot directly claim a home office deduction without an accountable plan. These deductions will likely be disallowed if attempted.

6. Penalties and Interest: The IRS may assess penalties for underpayment of taxes, interest on unpaid tax amounts, and potential accuracy-related penalties.

Implementing an Accountable Plan

To set up and use an accountable plan effectively:

1. Draft a written policy outlining reimbursement procedures.

2. Require employees to submit proper documentation for expenses.

3. Process reimbursements promptly based on actual documented expenses.

4. Maintain thorough records of all documentation and reimbursements.

Conclusion

An accountable plan is a powerful tool for S Corporations to maximize deductions while ensuring compliance with IRS regulations. It allows you to shift certain personal expenses into deductible corporate expenses while keeping them tax-free at the individual level. Without an accountable plan, you risk disallowed deductions, increased tax liability, and potential audits.

Remember, the key to successfully using an accountable plan is proper implementation and documentation. Always consult with a qualified tax professional to ensure your S Corporation is following best practices and maximizing its legitimate deductions.

Disclaimer:

This content is for informational purposes only and does not constitute legal, tax, financial or investment advice. The information provided may not be applicable to your specific circumstances and should not be relied upon as a substitute for individualized professional advice. This article is not intended to create, and it does not constitute, an attorney-client relationship. Megan Walukiewicz Robin is not a registered financial planner, accountant, investment advisor, or broker-dealer. Megan Walukiewicz Robin and Megan Robin Law are not responsible for any losses or damages resulting from actions taken based on the information provided on this website. Circular 230 Notice: Any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under U.S. federal tax law.