How to Use An Accountable Plan for S Corps to Deduct Home, Car, and More—Tax-Free
If your agency is an S-Corp, there is a good chance that you are not getting a tax deduction for your home office.
Many people will send their CPA business use home information at the end of the year, but what they are not realizing is that are not getting any deduction for that on their tax return.
Why is that?
S-Corporation income is not considered self-employment income. And only self-employment income can be used to deduct personal expenses such as your home office.
The good news is you can still deduct your home office and other expenses (car, travel, etc.) tax-free through an accountable plan.
Here’s a breakdown of how to take advantage of this powerful tool to save on taxes while staying compliant with IRS rules.
What Is an Accountable Plan?
Let’s start with the purpose of an accountable plan. It allows S Corp owners to reimburse themselves for business-related expenses that have been paid with personal funds. These expenses often include home office and car expenses—two of the most common reimbursements.
While these costs may be considered personal expenses, as long as they are used for business purposes, they are eligible for reimbursement.
This means that rather than paying for these out-of-pocket, you can get your company to reimburse you tax-free, while your business gets to deduct the reimbursement as a business expense, lowering your taxable income.
Why This Is Specific to S Corps (and Not Partnerships)
Many S Corp owners miss out on using this because they mistakenly think they can simply deduct business use of their home or other mixed-use expenses on their personal tax returns, like they would for a sole proprietorship or partnership. However, for S Corps, this is not the case.
In an S Corp, the business and the owner are considered separate entities. This means that the owner-employee must be reimbursed for any business-related expenses they incur personally. If the funds don’t move between the S Corp and the owner, those expenses cannot be deducted on a personal return. This is a key difference that often catches S Corp owners off guard.
Unlike in a partnership, where business income and expenses flow directly to the partners’ personal returns (without the need for reimbursement), S Corp owners must ensure the cash flows from the business to themselves as reimbursements. Failing to do so could lead to missed tax-saving opportunities and complications with IRS compliance.
The Benefits of an Accountable Plan
Why should S Corp owners use this? Simple—it’s a tax-saving win-win:
- Reimbursements are tax-free for the owner-employee. This means they don’t count as taxable income, avoiding additional personal tax liabilities.
- Expenses are deductible for your business, reducing the company’s taxable income.
- IRS compliance is straightforward with proper documentation and record-keeping, helping to avoid costly mistakes or audits.
What are the Qualifying Expenses?
Many everyday expenses qualify for reimbursement. Here are some of the most common:
- Home office expenses: Mortgage interest, utilities, rent, insurance, property taxes, and HOA fees.
- Car-related expenses: Mileage and a portion of auto-related expenses like fuel and maintenance.
- Phone and internet: Percentage based on business use.
- Business-related travel: Lodging, meals, and entertainment (within IRS limits).
- Professional expenses: Training, education, marketing fees, professional dues, and subscriptions.
Calculating your Home Office Reimbursement
We created this calculator that you can use to see how much you should be reimbursing yourself tax-free.
How an Accountable Plan Works
Setting up is simple and effective. As an S Corp owner, follow these steps to start reimbursing yourself tax-free for business expenses:
- Pay for mixed-use purchases with your personal account (e.g., your home office or car).
- Calculate the business portion of those expenses using the worksheet. For example, if your home office takes up 10% of your house, you can deduct 10% of your home expenses.
- Reimburse yourself from your business account by transferring money to your personal account. This amount will then be categorized as an “employee reimbursement,” making it tax-free.
- Document everything: Keep receipts, bank statements, and evidence that substantiates the expense was for business use.
- Return excess reimbursements: If you accidentally reimburse yourself more than necessary, return the extra funds to your business account promptly to stay compliant.
Accountable Plan Requirements
The IRS does have a few rules to ensure your plan stays legitimate. Here’s how to comply:
- Business-related expenses only: The reimbursed amount must reflect only the business portion of mixed-use items. For instance, if you use your home office for work 20% of the time, you can only reimburse yourself for 20% of the total cost.
- Documentation: Receipts, invoices, or any records that prove the expense must be kept. Be sure to show how the purchase relates to business use.
- Return excess payments: If you over-reimburse yourself, IRS rules require you to return the excess within a reasonable time frame.
How Accountable Plans Impact Your Taxes
One of the most significant benefits of using this plan is that it does not affect your personal income taxes. Since the money is reimbursed for business purposes, the IRS doesn’t count it as part of your gross income, meaning you don’t need to report it on your tax return.
For your S Corp, these reimbursements are treated as legitimate business expenses, which helps lower the company’s taxable revenue. The key, however, is following the rules—if the IRS finds that your plan doesn’t meet their criteria, they can classify it as a “non-accountable plan,” and the reimbursements may be treated as taxable wages, incurring extra taxes.
Setting Up and Managing Your Accountable Plan
You don’t need a complicated setup to get started. While it’s not required to have a written plan, creating one ensures consistency and IRS compliance. Your plan should cover what expenses qualify, how to document them, and the process for reimbursements.
Key Takeaways
Let’s recap:
- Maximize your tax savings by reimbursing yourself for business-related expenses like your home office, car, phone, and internet.
- Stay IRS-compliant by documenting all reimbursements and ensuring that only legitimate business expenses are included.
- Run an efficient agency by regularly reviewing your mixed-use expenses and reimbursing yourself on a monthly basis.
- Avoid common S Corp pitfalls: Remember, you cannot deduct these expenses on your personal tax return; the cash must move between your S Corp and you personally for the deductions to be valid.
By properly using an accountable plan, you can turn personal expenses into tax-deductible business costs, lowering your overall tax burden while keeping your finances clean and compliant.
Still have questions?
Don’t worry, we’re here to help!
Here at Agency CPAs, we help digital agency owners stabilize & organize their finances so that they have more money in their pockets, and a clear trajectory for growth.
This includes saving more on taxes and helping you receive every tax deduction possible, through strategies like the accountable plan.
If you’re in search of an experienced agency accountant to help with your business, get in touch with us.
Simply use the calendar down below to book an introductory call and let’s see how we can help.
Until next time!
