You may or may not have ever heard of this thing called an Accountable Plan. It is something we talk about often here at JETRO. Regardless of where you are at, we are going to bring you up to speed in this article!
Do you reimburse yourself for business expenses put on personal accounts or expenses that are business and personal mix? In most cases we know you use your business accounts for business related expenses, but there are always moments when you have to use cash or your personal accounts to pay for something and you want the business to reimburse you.
If you have employees, this applies to reimbursing them as well. It’s important to keep specific records for these occurrences so that reimbursements can be tax free.
What is an Accountable Plan?
A fancy way of saying “reimbursement policy”.
- Purpose: This is for S Corporation owners that pay for business (or personal and business mix) expenses using their personal accounts.
- An Accountable Plan is a reimbursement policy and expense reporting system that allows owners and their employees to turn in expense reports to the business for reimbursement in a way that keeps those amounts from being counted as taxable income.
- It is important to note that if you have an expense that is 100% business related, simply run it through a business account.
- However, if you have expenses you accidentally paid for personally or expenses that have both a business and personal use (think home office) then you will want to use an accountable plan.
Why Is It Important To Have An Accountable Plan?
Because if you reimburse yourself without an Accountable Plan, that money may be considered taxable income.
How Do I Implement An Accountable Plan?
Below are the steps for establishing an Accountable Plan.
- Adopt a written reimbursement policy (Accountable Plan). You can find a sample document here. Keep this in your corporate records. Important to consider:
- The expense(s) must have a valid business purpose.
- Owners (and employees) must be able to identify the expense with a receipt and have documentation (substantiation) that supports it.
- You should provide documentation in a timely manner.
- Advances can be given to provide for anticipated expenses but any unused funds or non business items must be returned.
- Create an accountable plan template that you can fill out to determine the reimbursement amount. You can find a sample here.
- Make the reimbursement payment. Pay from the business bank account to your personal (or employee’s) bank account.
- Note: Keep all original reports and substantiation documents for your records.
Example of Common Accountable Plan Expenses
Here are some items we typically see involved in an Accountable Plan reimbursement.
- Home Office
- First determine business use percentage by taking square footage of office divided by total home square footage.
- Multiply business use percentage by all related costs to determine the reimbursement amount. This could include: mortgage interest, property taxes, rent, insurance, utilities, HOA dues, repairs and maintenance, cleaning, lawn care, etc.
- Automobile (Owned by Employee, NOT Business)
- First determine business use percentage by taking business miles driven divided by total miles driven and be sure to keep a mileage log.
- Then use one of two methods:
- Mileage Method (Required if less than 50% business use): Simply take 57.5 (2020) cents per business mile.
- Actual Method: Multiply business use percentage by all related costs to determine the reimbursement amount. This could include: loan interest, lease payment, fuel, registrations, car washing, repairs and maintenance, etc.
- Office Expenses
- Multiply business use percentage by the cost of: Internet, Cell Phone, etc
- Travel, Parking, Tolls, Business Meals, etc.
- Any other business related item (whether full or partial) that was paid for personally.
- Remember: If an item is 100% business use, save the extra effort and simply run it through the business account. This is specifically for business items you accidentally paid for personally or items that are business and personal mix.
If you don’t have an accounting or tax advisor (or you need assistance with anything discussed), click here to book your complimentary strategy session with JETRO.