A lot of small business owners pay for expenses out of pocket without realizing there’s a smarter way to handle it.

If you’ve ever paid for your phone bill, home office, or business travel personally, you can get reimbursed for those costs, completely tax-free.

That’s what an Accountable Plan does.

It’s an IRS-approved way for business owners to pay themselves back without triggering extra income tax or payroll tax.

Here’s how it works and how to set it up correctly.

1. What Is an Accountable Plan

An accountable plan is simply a formal reimbursement policy between you and your business. It allows you or your employees to submit business expenses that were paid personally and get reimbursed tax-free.

This applies to mixed-use expenses like your home office, cell phone, or internet bill, where part of the cost is personal and part is business.

Without a plan, the IRS can reclassify reimbursements as wages, meaning you’ll owe payroll and income tax on the payments.

2. Who Needs An Accountable Plan?

Accountable Plans are critical for S Corp and C Corp owners because you’re considered an employee of your business. If you reimburse yourself for expenses personally paid, it must be done through an accountable plan to stay compliant.

Sole proprietors and single-member LLCs don’t need one since they can deduct expenses directly on Schedule C.

But if you have employees, no matter your business structure, you must have an accountable plan in place to reimburse them properly.

3. How to Set Up an Accountable Plan

Setting one up is simple when you follow these steps:

1. Create a written reimbursement policy. The IRS doesn’t require a written document, but having one makes your plan audit-proof.
2. Use an expense report or reimbursement form. This is where you list the expense, the business purpose, and attach receipts.
3. Make the reimbursement payment. Move money from your business account to your personal account to complete the transaction.

Following these three steps ensures your reimbursements are legitimate and protected from being taxed as income.

4. The Four Key Rules of an Accountable Plan

The IRS has four basic requirements for your plan to qualify:

• Business connection: Expenses must be directly related to your business.
  
• Substantiation: You must keep proof like receipts, dates, and descriptions for every reimbursement.
  
• No excess reimbursements: Any overpayment must be returned or reported as taxable wages.
  
• Timeliness: Reports and reimbursements should be done promptly, ideally every month.
  
  

Stick to these rules, and your plan will stay fully compliant.

5. Common Expenses You Can Reimburse Tax-Free

Here are the most common costs business owners include in their accountable plan:

• Home office expenses
  
• Cell phone and internet
  
• Automobile mileage or costs
  
• Office supplies and subscriptions
  
• Business meals
  
• Travel, parking, and tolls
  
• Tools and small equipment
  
  

These everyday expenses can quickly add up to thousands in annual tax-free reimbursements when tracked and submitted properly.

6. Why It Matters

Without an accountable plan, your reimbursements could be treated as taxable wages — meaning you’ll pay both income and payroll taxes on money you could have kept tax-free.
For S Corp owners, it’s also the only IRS-compliant way to take deductions for home office or mileage expenses.
It’s one of the simplest and most overlooked tax strategies for small business owners.

Putting It All Together

An accountable plan lets you legally move money from your business to your personal account while keeping it completely tax-free.

It protects your deductions, keeps you compliant, and helps you take advantage of costs you’re already paying for.

If you don’t have one yet, it should be at the top of your to-do list.

👉 Download the free Tax Savings Starter Kit at TaxSavingsPodcast.com/starterkit to learn how small business owners save $10,000 or more each year through proactive tax planning.

Transcript

[00:00:00] Introduction to Accountable Plans

[00:00:00] Speaker: Today I am diving into an often overlooked but really powerful tax strategy, the accountable plan.

[00:00:05] if you have ever paid for a business expense out of your own pocket, maybe phone bills, travel, home, office costs, whatever it might be, and wondered, can I get reimbursed without getting taxed? This is for you.

[00:00:15] When done right, an accountable plan that's you or your employees, get reimbursed without that money being treated as taxable income. But mess it up. And the IS can reclassify those reimbursements as wages, meaning extra income tax and payroll tax. Today I'm gonna walk through what exactly an accountable plan is, why it matters, and what you avoid by doing it correctly.

[00:00:36] I'm gonna talk about how to implement one step by step and also talk about common footfalls, audit red flags and things you need to watch out for. By the end, you'll know whether you need one, how to get set up correctly, and how to use it safely. In your business. Let's dive into it.

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[00:01:10] What is an Accountable Plan?

[00:01:10] Speaker: So the first thing I wanna talk about is what is an accountable plan?

[00:01:13] Because it can be complicated. Let's break it down in easy to understand steps. An accountable plan is simply a fancy word for a reimbursement policy. It's a way to reimburse yourself where it's tax free income to you or business exp expense. You get a business expense and it's tax free income. To you.

[00:01:30] This is a reimbursement for items that are maybe business and personal mixed, or maybe you have a business expense that you accidentally paid for. Personally. This is a way to get that business deduction for those items that you paid for personally a properly set up accountable plan. Again, we'll give you that opportunity to get a reimbursement for it.

[00:01:48] Business expense and not taxable to you. 

[00:01:51] Importance of Accountable Plans

[00:01:51] Speaker: And why is an accountable plan so important? Why does every business need one, especially for those S corp owners? Because without a properly set up plan. It's taxable to the employee and potentially you as the owner. So if you are just reimbursing for a home office or reimbursing for cell phone and internet costs, if you don't have a properly set up plan that could be taxable to the recipient, whether that's you or whether that's your employees.

[00:02:14] And so it's super important that we have an accountable plan set up. 

[00:02:18] Who Needs an Accountable Plan?

[00:02:18] Speaker: So who needs one and when does it apply? Accountable plans generally stand, and when we're talking about the owner of the business, we're mainly talking about S-Corp and C-Corp. Since you are considered employees of the company, if you're set up as a sole proprietorship, you're just gonna take these deductions directly on your Schedule C when you're filing you're taxes, but if you're set up as an S Corp or a C corp and you're reimbursing yourself for items that you paid for personally, that are business related, or have some.

[00:02:44] Business related cost to 'em, and you're reimbursing for that. You need to have an properly set up, an accountable plan. The other situation when accountable plans are required, it's if you're reimbursing employees for expenses that maybe they paid for that are business related, maybe your bus, your employees travel, they pay for everything personally, and then you reimburse 'em for that.

[00:03:04] You need to have a properly set up accountable plan to make sure that reimbursement doesn't become taxable income to you. So if you are just reimbursing the owner of the business, we need an accountable plan. If you're an S or a C corp, if you're a sole prop, we don't need an accountable plan for reimbursement to the owner.

[00:03:18] You're just gonna take those deductions on your Schedule C. But if you're reimbursing employees, whether you're an S corp, a C corp, a partnership, a sole proprietorship, whatever it is, if you're reimbursing employees. You need to have a properly set up accountable plan. Alright, let's take a moment. If you're running a business and wanna stop guessing about taxes, we've put together a free resource to help.

[00:03:38] It's called the Tax Savings Starter Kit. You'll get our complete business deduction list. You'll get real world case studies of five to $25,000 in tax savings, and you'll get a complimentary discovery call with our expert team. Head to tax savings podcast.com/starter kit to download it one more time.

[00:03:55] That's tax savings podcast.com. Forward slash starter kit. Alright, let's jump back into it. 

[00:04:01] Steps to Implement an Accountable Plan

[00:04:01] Speaker: So when we talk about accountable plan, I wanna talk about how do we implement it, what are the steps to make sure that we're doing this correctly? Because with any tax strategy that we ever discuss, one of the important pieces is correct implementation.

[00:04:14] You might have what you consider an accountable plan put into place, but if you don't implement it correctly, it could come back to bite you. Let's talk about those steps. What do you need to do to ensure it? The biggest thing that we recommend is having a written plan. And proper reimbursement. So let's talk about the first one, a written plan.

[00:04:29] Tax rules do not require you to have a written accountable plan in place. However, we always recommend it as it makes it clear to both you and your employees if you're reimbursing employees and in the event of audit, it helps you make your case that much easier. You have a formalized.

[00:04:46] Accountable plan in place. Having that written plan is really important. Now, when we talk about a proper accountable plan, there are four main parts to the plan. The first one is business connection. The expenses that you're reimbursing must be a valid business expense that occurs in the normal course of the business, just as if you were to run it through the business.

[00:05:06] So we can't be reimbursing for things that aren't business related and hopefully getting a business deduction for it. They still need, just like any other business expense, it needs to be a valid. Business deduction. The second piece is substantiation. The employees or you as the owner, need to submit the required proof of a particular expense.

[00:05:24] Think of it as like an expense report. Maybe a trip sheet to say, here's the mileage, here's the stops we made. Or maybe it's just a receipt that shows what you spent the money on. A receipt or any kind of other documentation should include things like the amount, the business purpose, the date and time, a description of what was purchased.

[00:05:41] I always say write on receipts. The who, what, where, when, why. Write on the receipts. Who you were with, what was purchased, why is it a business related item? Write that in the receipts, and that's gonna be your proof. So any reimbursement still needs substantiation. The third piece is no access payment.

[00:05:57] So if there are any advances or access reimbursements made, that must be returned to the business or it needs to be recorded as taxable wages. So let's give an example. Let's say you have an employee. It's going on a business trip or you as a business trip and you say I'm gonna pre reimburse them money.

[00:06:13] So they have money to spend on meals. And let's say you say, I'm gonna send them $300 for the, for to cover meals and business expenses on this trip. And let's say that they go on this trip, they come back and they give you receipts and it adds up to $200. So you gave them 300, they gave you receipts for $200.

[00:06:30] That means that your initial reimbursement was a hundred dollars too much. They either need to return that a hundred dollars to you. Or it needs to be added in as taxable wages, so we can't make excess payments. Or if someone gives you a receipt for a $70 gas ticket, we can't give 'em a hundred dollars.

[00:06:47] Or if we do 30 of that has to be considered taxable wages. The four Ps that's important in an accountable plan is timeliness. The reimbursements and that substantiation have to be submitted in a timely fashion. We recommend doing this monthly, so to have a monthly recurrence that you're doing these types of reports and making those reimbursements.

[00:07:08] So when we talk about properly setting up an accountable plan, what are the steps? Number one, and this is our recommendation, is we adapt a written. Reimbursement policy, a written reimbursement policy, AKA, your Accountable plan. Again, it's not required by the IRS, but it helps defend it. If you were ever to get asked about it.

[00:07:26] We have a sample of this in Tax Home. You can just download, fill in your information and be on your way with it. The second step is to create an accountable plan temp. Or an expense report, and this is what people are gonna submit to get that reimbursement that proves what you're reimbursing for and why it's a business expense.

[00:07:42] So it's an expense report or what we call an accountable plan template. Again, we have a sample of this in tax L that makes it super easy to record a lot of these regular expenses that show up on an accountable plan. And the third one, and this one might seem make, might seem obvious, but you need to make the reimbursement payment.

[00:07:59] You're gonna make a reimbursement payment from the business account. Two, the personal account, and that's the setup of an accountable plan. Number one, adopt a written reimbursement policy. Eight k your accountable plan. Create an accountable plan template or an expense report, and then make the reimbursement.

[00:08:14] That's how we properly set up an accountable plan. We have samples for all of those directly within taxo. 

[00:08:20] Common Expenses in Accountable Plans

[00:08:29] Speaker: Now let's talk about some of the common types of expenses that we see on an accountable plan. And this is important because these are the items that are gonna give those opportunities for you to great business expenses.

[00:08:31] Not some of these items. The first one, and this is the biggest one that we often see is a home office deduction. Now, home office is typically something that majority of those expenses for that home office. Our personal expenses, you're living in that place, but a portion of those expenses can be a business deduction and since it's, you're paying for these items personally, the proper way.

[00:08:51] To get a business deduction for that home office, especially when you're set up as an S corporation or a C corporation, is to use an accountable plan to reimburse yourself for the business use of that home office. The other one would be automobile expenses. If you have an automobile that's owned by the individual, not the business owned by the individual, to properly get a business deduction for any automobile expenses, whether you're using the mileage method or the actual method, you need to have an accountable plan in place and you're reimbursing.

[00:09:19] For the business use of that personal automobile. We often see things like office expenses, maybe it's paper cords, charging stuff, all those types of things. A travel, whether you're doing an actual travel reimbursement or per diem travel is oftentimes on an accountable plan. Parking in tolls obviously go along with that.

[00:09:36] Business meals, a lot of times, and I had a case like this just recent. Went to lunch with a friend, talked business the whole time. Swiped my personal card was like, oh, that was a business expense. I'm gonna add that to my accountable plan. So business meals are an opportunity for that. Maybe there's tools and equipment that you're paying for personally.

[00:09:52] Maybe it's tools and equipment they're using. Mostly personal, but some business, there's an opportunity for that using subscriptions. Cell phone and internet. Obviously cell phone, internet, especially if you're working from home, have a lot of business use. But it's not a hundred percent necessarily. So maybe you're just reimbursing using an accountable plan to reimburse for the business.

[00:10:08] Use percentage of those items. That's a lot of what we see wrapped up into an accountable plan. Now, when we talk about an accountable plan, there's this some things that you need to watch out for. 

[00:10:18] Key Requirements and Best Practices

[00:10:18] Speaker: First off, as with any tax strategy, you need to dot your I's and cross your T's properly. Set up this plan. I know I said earlier, it's not required to have a formal document, but just do it.

[00:10:30] It's easy to download one, fill in a few things, have it on file. If you get a knock from the irs, the last thing you wanna do is to try to prove all this when you can just show 'em a document that says, here is our accountable plan. That makes it so much easier. In audit proofs the strategy. The next thing you need is proof.

[00:10:45] You need full proof of the business expenses. So if you're getting reimbursed for home office, if you're getting reimbursed for travel, if you're getting reimbursed for meals, make sure you have the receipts and proof. That make up an account for that reimbursement amount, and then you need to actually make the reimbursement moving money from the business account to the personal account for that reimbursement.

[00:11:05] The last thing that we want is a reimbursement to be taxable to you or your employees. That's the last thing we want, and that's what we just need to make sure we set up an accountable plan properly. If you are organized as an S or a C corporation, you need to have an accountable plan in place because every one of you.

[00:11:23] 99% of you should be using home office in some sort of automobile expense, and you cannot properly get a home office deduction with an S corporation without an accountable plan set up in place. So make sure you just do the work, put that time in, put that effort in, get that reimbursement going so it's not taxable to you.

[00:11:40] It's a business expense and it's not taxable to you. Alright, so let's recap the accountable plan. An accountable plan is essentially a formal reimbursement policy that allows your business to reimburse you or your employees for business expenses without those reimbursements becoming taxable. Now, of course, if you have a hundred percent business related expenses.

[00:12:01] Just run them through the business. Don't worry about an accountable plan. An accountable plan is specifically for those items that are business and personal mix. You're getting a reimbursement for the business portion of them, or if you accidentally paid for a business item using your personal card, here's a way to get that reimbursement done for it.

[00:12:18] Now, the key requirements when we're talking about an accountable plan is, one, a business connection. Two proper substantiation, receipts, dates, purposes, business reason for these expenses. Number three is no excess reimbursements. Any overpayment has to be returned or it's gonna be considered taxable income.

[00:12:37] And number four, timeliness of reporting. We recommend making these, sending in your expense reports and making those reimbursements on a monthly basis. And again, within tax sale, we have documentation to help you along this entire. Process. It's especially important when you're operating as an SSO S corporation or a C corporation, 'cause you're treated as an employee of the business.

[00:12:59] And finally, you should put it in writing. Even the IR, even though the IRS doesn't technically require a plan, a written plan. Do it, maintain good documentation and follow the rules strictly. Or if you don't risk having reimbursements reclassified as wages with tax consequences. 

[00:13:15] Conclusion

[00:13:15] Speaker: So there you have it. This is an extremely important tool that if you're not implemented yet, if you haven't implemented yet, it is something you want to get on your checklist right away.

[00:13:23] In Taxo, we have sample templates, a checklist and audit proofing tips in to show you that you don't have to do this from scratch. If you want help from RTF Tax professionals implementing this strategy along with so many other tech strategies, go visit tax elm.com. That's TAX elm.com. Or click the link into the description for a free discovery call.

[00:13:43] We are helping people like you legally lower your tax bill every single day. If you found this helpful, don't forget to hit subscribe, hit that like button and share it with a business owner who's sick of paying too much in tax. Thanks for stopping by and I'll see you on the next one.