When you’re the owner of a corporation or S-corporation, it can feel natural to pay for business-related expenses out of your own pocket from time to time. After all, you are the business, right? Well, not exactly — and the IRS makes that distinction very clear. Corporations are separate legal entities, which means they have their own bank accounts, tax returns, and sets of rules. One of the most misunderstood areas is how to properly handle owner-paid expenses and how to legally deduct them on the corporate return.
Let’s break down why corporations and S-corporations cannot directly deduct shareholder expenses, how an accountable plan bridges that gap, and how this strategy can legally reduce your taxable income while staying compliant.
What Does “Accountable Plan” Mean?
An accountable plan is an IRS-approved method for reimbursing employees — including shareholder-employees — for business-related expenses without treating those reimbursements as taxable income. It allows the business to take a deduction for the expenses, while the employee receives the reimbursement tax-free.
Without an accountable plan, any reimbursement or payment made to a shareholder for business expenses is treated as wages, subject to payroll tax, or as a non-deductible distribution — which is a lose-lose.
Think of an accountable plan as a formal agreement: “You, the employee, can spend your own money on legitimate business expenses, and we, the corporation, will reimburse you — as long as you follow the rules.”
IRS Requirements for an Accountable Plan
To qualify as an accountable plan, the IRS requires three key things:
1. Business Connection
The expense must have a business purpose. That means it must be ordinary and necessary for the business. Think: mileage, meals, travel, home office expenses, supplies, continuing education, etc.
2. Substantiation
Employees must provide adequate records or documentation (like receipts or mileage logs) within a reasonable period — typically 60 days. Documentation should include:
- The amount
- Time and place
- Business purpose
- Business relationship (if meals or entertainment)
3. Return of Excess
If an employee is advanced more money than they spent, they must return the excess reimbursement within a reasonable time — usually 120 days.
Failing any of the above rules turns an accountable plan into a non-accountable plan, and that means reimbursements are treated as wages, subject to income tax and payroll tax withholding.
What is an Example of an Accountable Plan in Action?
Let’s say Jennifer is the 100% shareholder of her S-corporation, Jennifer’s Real Estate, Inc. She drives her personal vehicle to show homes, attend networking events, and meet with clients. Instead of running vehicle costs through the business, which she can’t legally do since the car is in her personal name, she sets up an accountable plan.
Here’s how it works:
- Jennifer tracks her business miles using an app like MileIQ or QuickBooks Self-Employed.
- At the end of each month, she submits a mileage report to her S-corporation.
- The company reimburses her at the current IRS standard mileage rate (e.g., 67 cents per mile in 2024).
- Jennifer receives a tax-free reimbursement, and the business gets a deduction.
Win-win.
Without this plan, Jennifer’s reimbursement might be treated as a distribution, and the business would lose the deduction entirely.
How Can I Legally Reduce My Income with an S Corporation?
Using an accountable plan is just one of several strategies to reduce taxable income through your S corporation:
1. Reimburse Yourself for Business Expenses
- Home office
- Cell phone
- Internet
- Business mileage
- Education or licenses
All these can be reimbursed through an accountable plan — just make sure it’s well-documented.
2. Pay a Reasonable Salary (But Not Too High)
S corporations are required to pay shareholder-employees a reasonable salary, but any net income after salary passes through to your personal return as self-employment tax-free. Finding the right balance here is crucial — and where a tax professional can really help.
3. Set Up a Retirement Plan
S-corps can contribute to retirement plans (like a Solo 401(k)) on behalf of shareholders, creating a deduction for the business and tax deferral for the owner.
4. Use Pre-Tax Fringe Benefits
You can deduct health insurance premiums, HSA contributions, and more — but the rules for 2% S-corp shareholders can be tricky, so make sure you talk to your advisor.
Why Can’t the Corporation Just Deduct My Expenses Directly?
Because you are not the corporation. Even if you’re the sole shareholder, the IRS sees your corporation or S-corporation as a separate legal entity.
When you pay for an expense personally (let’s say a plane ticket to a business conference), it never hit the corporate bank account. If the corporation doesn’t reimburse you, there’s no expense on the books. And if the corporation tries to claim it without reimbursing you, it’s a red flag for the IRS.
This separation is critical for:
- Liability protection
- Audit defense
- Maintaining proper accounting records
Can an LLC Have an Accountable Plan?
Yes — but it depends on how the LLC is taxed.
- If your LLC is taxed as a corporation or S-corporation, you can and should implement an accountable plan.
- If your LLC is taxed as a sole proprietorship (i.e., a single-member LLC), an accountable plan doesn’t apply in the same way because you and the business are the same entity for tax purposes.
However, multi-member LLCs taxed as partnerships can use similar structures, often through guaranteed payments or expense reimbursement agreements, but it’s more nuanced. Talk with your accountant to implement this correctly.
Final Thoughts: Don’t Leave Money on the Table
If you’re paying business expenses out of your personal pocket and your corporation isn’t reimbursing you — you may be missing out on legitimate deductions. And if you’re reimbursing yourself without a formal accountable plan, you could be setting yourself up for IRS trouble.
The good news? This is a fixable issue, and the Molen & Associates team can help you set up a custom accountable plan that works for your business — and your wallet.
Need Help Setting Up an Accountable Plan?
You don’t have to figure this out on your own. Whether you’re just getting started or want to make sure your current plan checks all the boxes, our team is here to help.
📞 Call us today or book a consultation online. Let’s make sure you’re getting all the deductions you’re entitled to — the right way.
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