Accountable Plan

Want to pay back employees for business costs without them owing extra taxes? An accountable plan can help. It’s a smart way for businesses to handle expenses like travel, meals, and home office costs. Get the facts right here.

What is an Accountable Plan and Why You Need One?

An accountable plan is like a special agreement between a business and its employees. It allows the business to pay employees back for work-related expenses. The really cool part? The money the employee gets back isn’t counted as income by the IRS. This means they don’t pay income taxes or payroll taxes on that money.

For the business, it’s great too. The money you pay out through an accountable plan can be deducted as a business expense. This lowers your business’s taxable profit.

Think of it this way: without an accountable plan, if you give an employee money for a work expense, it might look like extra pay to the IRS. This means more taxes for both you and the employee. With an accountable plan, it’s clear the money is just a reimbursement for a real business cost.

Getting an accountable plan set up correctly is super important. Why? Because the IRS checks these things. Reports show that IRS checks on expense payments went up by 18% from 2022 to 2024 for small to medium-sized S corps. This highlights why following the accountable plan rules is so vital.

Key Rules for an Accountable Plan

Setting up an accountable plan sounds simple, but you have to follow some specific rules from the IRS. If you don’t, those reimbursements could become taxable income for your employees. This is called a “non-accountable plan” and it’s not what you want.

Here are the main rules the IRS requires for an accountable plan:

There Must Be a Business Connection

Every expense you reimburse must be for a real business purpose. It has to be connected to your company’s work. You can’t just reimburse personal stuff. For example, paying for a work trip’s hotel is a business connection. Paying for the employee’s personal weekend getaway is not. The expense must directly help your business.

The Employee Must Provide Adequate Accounting

This is a fancy way of saying employees need to show proof of their expenses. They need to keep records. This usually means keeping receipts for things they bought for work. It also includes keeping track of mileage for work travel or logs for business calls. The proof needs to show:

The amount of the expense.
When and where the expense happened.
The business reason for the expense.

This proof needs to be given to the business within a reasonable time. The IRS usually considers 60 days after the expense happens or 60 days after the trip ends as reasonable.

Any Excess Money Given Must Be Returned

Sometimes, a business gives an employee an advance for expected expenses, like for a business trip. If the employee doesn’t spend all the money, they must give the extra back to the business. They also need to return any money received for expenses that weren’t approved or for which they didn’t provide proof. This money needs to be returned within a reasonable time, usually within 120 days from when the expense was paid or incurred. If they don’t return the excess, that amount becomes taxable income. The IRS talks about these rules in detail. You can find more information in IRS Publication 463 (2023), Travel, Gift, and Car Expenses on the IRS website.

No IRS Filing is Needed for the Plan Itself

You don’t need to send your written accountable plan policy to the IRS. However, you must have a written or clearly communicated policy. And you need to keep records showing that you are following the rules. If the IRS ever looks at your business (an audit), you’ll need to prove your plan meets the accountable plan requirements.

Benefits of Having an Accountable Plan

Having a proper accountable plan offers big advantages for both your business and your employees. It clearly separates business expenses from personal spending, which helps everyone and keeps you on the right side of tax laws.

Here are some of the main benefits of using an accountable plan:

Tax Savings for Employees and Owners

This is often the biggest reason businesses set up an accountable plan. When you reimburse an expense under a compliant plan, that money is not considered taxable income for the person receiving it. This means:

No income tax withholding from the employee’s paycheck.
No Social Security or Medicare payroll taxes for the employee.

For business owners, especially those of S corps or C corps, using an accountable plan to reimburse their own legitimate business expenses means putting money in their pocket tax-free.

Tax Savings for the Business

Your business can deduct the expenses that it reimburses through the accountable plan. These are treated as ordinary and necessary business expenses. Deducting these costs lowers your business’s total taxable income. Lower taxable income means less business tax to pay. It’s a win-win! You can see how this works in practice. One small business owner shared on YouTube in 2024, “Setting up an accountable plan for our S corp was the smartest financial move—saved us a ton in taxes and made reimbursement clean and compliant.” You can watch a video explaining the basics of an Accountable Plan here: Accountable Plan basics – YouTube.

Reimbursing Home Office Expenses

For employees or owners who use a home office for work, an accountable plan is a great way to handle those costs. While self-employed individuals can deduct home office expenses directly on their tax return (like on Schedule C), an employee (even a shareholder-employee of an S corp or C corp) generally cannot deduct unreimbursed employee business expenses on their personal tax return due to changes in tax law.

However, using an accountable plan, the business can reimburse the employee/owner for legitimate home office expenses (like a portion of rent or mortgage interest, utilities, and internet) related to using a specific space regularly and exclusively for business. The business then deducts these costs. This allows the tax benefit for the home office to be used, even when the person using the office is an employee of their own corporation. On Reddit, someone in late 2023 mentioned, “We didn’t realize until our CPA pointed it out how much money we were losing by not formally documenting our home office expenses through an accountable plan.”

Covering Costs for Mixed Personal and Business Use Items

What about things like a cell phone or internet service that an employee uses for both work and personal reasons? An accountable plan allows the business to reimburse the business portion of these costs. For example, if 70% of an employee’s phone use is for business, the business can reimburse 70% of the monthly bill, provided there’s a way to reasonably figure out the business use percentage. This reimbursement is tax-free to the employee, and the business can deduct its share.

This flexibility is key for businesses where employees or owners frequently use personal items for work.

Based on a survey in 2023 by Bench, a company that helps small businesses with bookkeeping and taxes, a surprising 62% of small businesses didn’t have a formal accountable plan. This means many businesses might be missing out on tax savings and risking problems with the IRS by not properly handling expense reimbursements. Having a documented accountable plan protects both the business and its employees.

How to Set Up and Use Your Accountable Plan

Getting an accountable plan working correctly for your business involves several steps. It’s not just about writing a plan; it’s about how you use it every day.

Here are some simple, actionable steps and best practices for implementing and managing your accountable plan:

Step 1: Write Down Your Policy

This is super important. You need a clear, written document that explains your accountable plan. This policy should state:

What kinds of expenses are eligible for reimbursement (e.g., travel, meals, mileage, supplies, home office).
What information employees need to provide for proof (like receipts, dates, business purpose).
The deadline for employees to submit their expense reports (e.g., within 30 or 60 days).
How and when reimbursements will be paid.
The timeframe for returning any excess advances or unapproved funds (usually within 120 days).

Having a written policy makes the rules clear for everyone and provides proof to the IRS that you have a formal plan.

Step 2: Communicate the Policy to Your Employees/Owners

Make sure everyone who will be reimbursed understands the accountable plan rules. Go over the written policy with them. Explain why you have the plan (for tax-free reimbursement and business deductions) and how it works. Teach them how to track their expenses and submit reports correctly. Good communication prevents mistakes later on.

Step 3: Get Proper Substantiation (Proof)

This is where the IRS checks closely. For every expense under the accountable plan, you must get adequate proof from the employee. This means:

Receipts: For most purchases, especially for meals, lodging, and supplies.
Mile Logs: For car travel, noting the date, starting and ending points, miles driven, and the business purpose.
Other Records: Like copies of invoices, bills (for phone, internet, etc.), or logs for phone calls if you’re reimbursing a portion of service based on use.

Make sure employees submit this proof along with their expense report form.

Step 4: Review and Approve Expenses

Before you pay any reimbursement, someone at the business (the owner, a manager, or an accountant) needs to review the expense report and the proof. Check that:

The expense is covered by your written accountable plan policy.
The expense has a clear business purpose.
The proof (receipts, logs, etc.) is complete and matches the requested reimbursement amount.
The report was submitted on time.

Only approve expenses that meet all the accountable plan requirements.

Step 5: Pay the Reimbursement and Handle Excess

Once approved, reimburse the employee. The reimbursement should match the approved amount. If you gave the employee an advance and they returned excess funds, make sure you have a process for receiving that money back within the required timeframe (usually 120 days). If they don’t return the excess, it must be added to their wages and reported on their W-2.

Step 6: Keep Good Records (Business Side)

Your business needs to keep records of everything related to the accountable plan. This includes:

The written accountable plan policy.
All submitted expense reports and the supporting proof (receipts, logs, etc.).
Records of reimbursements paid.
Records of any excess funds returned (or added to wages).

Keep these records for at least three years after the tax return that includes the deduction for those expenses is filed.

By following these steps consistently, you can ensure your accountable plan meets IRS rules, provides tax benefits, and runs smoothly. Remember to check in with your accountant or tax advisor to make sure your specific plan is set up correctly for your business type. The Journal of Accountancy has additional info on accountable plan policies and compliance. Bench.co also offers helpful articles on how IRS Accountable Plans work and specific guidance for S corps, which is essential given the increased IRS scrutiny on these types of businesses.