Accountable Plan: Tax-Free Expense Reimbursement for S-Corp Owners and Employees

Accountable plan requirements (Treas. Reg. 1.62-2):

1. Business connection. The expense must have a business connection. The employee must have incurred or will incur the expense in connection with services as an employee.

2. Substantiation. The employee must adequately account for the expense within a reasonable period (60 days of incurring the expense is the safe harbor). This means providing receipts, mileage logs, or other documentation.

3. Return of excess. Any amounts paid in excess of substantiated expenses must be returned to the employer within a reasonable period (120 days of the expense or statement date is the safe harbor).

If any of the three requirements is not met, the entire reimbursement is treated as wages (nonaccountable plan).

Common expenses reimbursed through an accountable plan:

• Home office expenses (portion of rent/mortgage, utilities, internet)
• Cell phone (business-use percentage)
• Vehicle mileage (at the IRS standard mileage rate or actual expenses)
• Business travel (flights, hotels, meals at 50%)
• Professional development and conferences
• Tools and equipment used for business
• Computer and software used for business
• Professional dues, licenses, and subscriptions

Who benefits most:

• S-Corp shareholder-employees: Since TCJA eliminated the Schedule A deduction for unreimbursed employee expenses, the accountable plan is the only way for S-Corp owners to deduct expenses they incur personally for the business.
• Sole proprietors do not need an accountable plan because they deduct expenses directly on Schedule C.