Why an IRS Accountable Plan Is a Smart Tax Strategy for S Corporation and C Corporation Owners

For owners of S Corporations and C Corporations, structuring reimbursements through an accountable plan is a practical and IRS-compliant way to deduct business-related expenses without creating additional tax liability. Many business owners pay out of pocket for expenses like vehicle use, home office space, travel, and office supplies. Without a formal reimbursement structure, these costs can either go undeducted or be treated as taxable income when reimbursed.

An accountable plan offers a solution that benefits both the corporation and the shareholder-employee. It allows the corporation to deduct legitimate business expenses, while the recipient receives the reimbursement tax-free. This strategy is particularly valuable for S Corporation owners, who are otherwise restricted from deducting unreimbursed employee business expenses on their personal tax returns.

Understanding the Accountable Plan Rules

An accountable plan must meet three key requirements established by the IRS. First, there must be a business connection, meaning the expenses must have been paid or incurred in the course of performing services as an employee of the corporation. Second, there must be adequate accounting, which involves timely documentation of the expenses—such as submitting receipts, mileage logs, or other records—to substantiate the business purpose, amount, and timing of the expense. Finally, the plan must require the return of any excess reimbursements within a reasonable period of time. The IRS generally considers the following timeframes to be reasonable: the advance must be made within 30 days of when an expense is paid or incurred; the expense must be substantiated within 60 days after it is paid or incurred; and any excess amount must be returned to the employer within 120 days after the expense is paid or incurred.

When a reimbursement plan meets all three of these criteria, the reimbursements are excluded from the employee’s wages and are not subject to income or employment tax. The corporation, in turn, is entitled to a full deduction for the expenses.

Common Expenses Reimbursed Under an Accountable Plan

Business mileage is one of the most frequently reimbursed expenses under an accountable plan. Corporate owners and employees can track mileage driven specifically for business purposes—such as traveling to meet clients, attending conferences, or making business-related deliveries—and receive reimbursement at the IRS standard mileage rate. This rate is updated annually and is intended to cover not only fuel costs but also wear and tear, maintenance, insurance, and depreciation associated with business use of a personal vehicle. To qualify, mileage must be documented with a log that includes the date, destination, business purpose, and number of miles driven for each trip. Commuting between home and a regular workplace does not qualify for reimbursement.

Another commonly reimbursed expense is the home office. If an owner or employee uses a portion of their home regularly and exclusively for business activities—such as managing administrative tasks, holding virtual meetings, or storing inventory—the corporation may reimburse a proportionate share of household expenses. These may include rent or mortgage interest, utilities (electricity, water, gas), internet service, and even a portion of property taxes or homeowners insurance. The reimbursable amount is typically calculated based on the square footage of the dedicated home office space relative to the total square footage of the home. As with all accountable plan expenses, this arrangement must be substantiated with proper documentation, such as utility bills, rental agreements, and a floor plan or description of the space used.

Beyond mileage and home office costs, many other business-related expenses may qualify for reimbursement. Travel expenses—including airfare, hotel accommodations, rental cars, parking fees, and meals—are reimbursable when incurred while conducting business away from the taxpayer’s tax home. Additionally, items such as office supplies, software subscriptions, cell phone usage, or equipment (e.g., laptops or printers) that are purchased personally but used exclusively for business purposes may also be reimbursed by the corporation.

Why This Matters for S Corporation Owners

Under current tax law, unreimbursed employee business expenses are not deductible on personal returns due to the suspension of miscellaneous itemized deductions. This means that without a formal accountable plan in place, S Corporation owners cannot take a tax deduction for business expenses they pay out of pocket. Worse, if the corporation reimburses the owner informally or inconsistently, the IRS may treat those payments as taxable compensation.

By establishing an accountable plan, S Corporation owners can ensure that these legitimate business costs are deducted by the corporation and received as tax-free reimbursements. This strategy not only reduces taxable income for the business but also avoids unnecessary tax liability for the owner.

Implementation Considerations

While the IRS does not require the accountable plan to be in writing, having a written policy helps establish consistency and protects against reclassification of reimbursements during an audit. It should outline the types of expenses covered, documentation requirements, and the process for returning excess advances. Reimbursement requests should be submitted in a timely manner, with proper supporting documentation, and the corporation should maintain records for compliance.

In the case of travel advances, timing is important. Advances should be reasonably calculated not to exceed expected expenses, and employees must substantiate those expenses or return any unused amounts within a reasonable timeframe.

Final Thoughts

An accountable plan is a simple and effective tax strategy that enables S Corporation and C Corporation owners to convert out-of-pocket business expenses into legitimate, deductible corporate expenses. At the same time, the reimbursements remain tax-free to the recipient when properly handled.

For corporations that do not yet have a formal reimbursement policy, implementing an accountable plan can be a strategic move to maximize tax efficiency and stay in compliance with IRS rules. Business owners should consult with a tax advisor to ensure the plan is structured correctly and aligned with their specific business practices.

The information provided in this blog post is intended for general informational purposes only and should not be construed as legal or tax advice. While every effort has been made to ensure the accuracy of the information, tax laws and regulations are subject to change, and individual circumstances may vary. For personalized advice and to ensure compliance with current tax laws, it is strongly recommended that you consult with a qualified tax professional, financial advisor, or legal counsel. The author and publisher of this blog assume no responsibility for any errors or omissions, or for any actions taken based on the information contained herein.