How to Start Using an Accountable Plan for Your S-Corp

How to Start Using an Accountable Plan for Your S-Corp

Contact Us

Hopefully you’re pretty familiar with what an Accountable Plan is and why your S-Corp should be using one from our other article. Now you’re likely wondering how to start using one for your own S-Corp to take advantage of tax deductions.

Surprisingly, there isn’t actually a formal requirement to have a written Accountable Plan, but that doesn’t mean you shouldn’t. Using an Accountable Plan is as easy as following the rules outlined by the IRS, as discussed previously, and using this system to reimburse employees for expenses and then deducting these reimbursements on your S-Corp taxes.

We know, it sounds too simple to be true. Like most IRS stuff, there aren’t always rigorous or straightforward steps, but there can be major consequences, which is why we still have some recommendations for implementing an Accountable Plan in a more tangible or formal way to avoid any issues in the future, especially in the event of an IRS inquiry.

How to Create a Written Accountable Plan for your S-Corp

First up, write out an official business document that details how the Accountable Plan will operate for your S-Corp. This document should outline what practices the plan will use concerning proof for reimbursements, paybacks, etc. and it should follow the rules already laid out by the IRS and addressed in our article. Here’s a list to get you started and make sure you cover the bases in your plan.

  • Outline the requirement for employees (remember you’re also an employee if your an S-Corp owner) to substantiate expenses with documentation 
  • Outline the timing requirements for providing the above substantiation 
  • Outline what qualifies as substantiation, and make sure it is in line with what the IRS requires 
  • Outline the requirement for employees to return and excess payments and the timeline of this
  • Provide information on what is considered reimbursable or non-reimbursable 
  • If not all employees are reimbursable, it may be a good idea to outline this and explain the reasoning

This plan document should be added to an employee handbook, if you have one. As a small S-Corp, you may not have an employee handbook, in which case, the document should be kept with all other formal business documents or added to any other official business plan etc.

How to Formalize the S-Corp’s Written Accountable Plan

The next step we recommend is to really make your Accountable Plan irrefutable by recording its adoption in your business meeting minutes. Not sure what minutes are? Check out this article for smaller businesses or this article for larger S-Corps.

If your S-Corp is larger and therefore having formal shareholders’ and directors’ meetings, then you’ll want to record the Accountable Plan adoption in the minutes of the next meeting. For small S-Corps, where minutes are less formal, you should still outline the Accountable Plan adoption in the area where you record major business decisions and include the written plan.

How Start Using the Accountable Plan

The last step is to actually put the plan into action. For larger S-Corps with multiple employees this will probably happen a bit more organically since after being notified, employees will begin submitting expenses for reimbursement and you’ll be receiving substantiation and reimbursing accordingly.

For smaller S-Corps, where there may only be one or two owner-employees, it may take a little bit to get into the habit, but it’s important to do so. If you’re running an S-Corp, you already know you wear two hats as an employee and a CEO, and the Accountable Plan is just an extension of that.

As the employee, keep all your receipts and provide substantiation of any expenses you paid for personally. You’ll want to keep your finance accounts following the same timelines as you would for any other employee. This means reimbursing yourself, recording substantiation, and paying back any excess to the S-Corp within the timeframes outlined in your written plan.

How to Collect Tax Savings for Your Accountable Plan

After all your excellent record keeping, you finally get the reward! You’ll take all of those reimbursements paid to yourself or other employees and deduct them from your S-Corp taxes as business expenses. Which as an S-Corp owner, means bigger profits and bigger “distributions” in your pocket. And best of all, you’ll sleep sound knowing that if the IRS does come knocking, you have a full proof record of your deductions and your Accountable Plan.

Categories: tax