06/30/2025
As a business owner, you’re constantly looking for ways to minimize your tax burden and keep more of what you earn. One often-overlooked strategy that can yield significant tax savings is the use of an accountable plan. This IRS-compliant reimbursement arrangement allows businesses to reimburse employees—including owners—for certain out-of-pocket business expenses, without those reimbursements counting as taxable income. The best part? The business gets a deduction, and the employee pays no tax on the reimbursement. That’s a win-win.
In this post, we’ll walk through what an accountable plan is, why it matters, how to set one up, and which expenses you can legally reimburse under this plan.
What Is an Accountable Plan?
An accountable plan is a formal reimbursement policy that allows a business to repay employees for job-related expenses without treating the payments as taxable wages. This is only possible if the plan meets specific IRS requirements.
To qualify as an accountable plan, reimbursements must meet three key conditions:
Business Connection Test – The expense must have a business purpose and be incurred in the course of employment.
Substantiation Test – The employee must substantiate the expense with receipts or documentation within a reasonable period (typically 60 days).
Return of Excess Reimbursements – If the reimbursement exceeds the substantiated amount, the employee must return the excess within a reasonable period (typically 120 days).
If these conditions aren’t met, the reimbursements must be included in the employee’s W-2 wages and are subject to employment taxes.
Why It Matters
Failing to use an accountable plan means you're likely missing out on tax deductions or improperly classifying expenses.
Let’s compare:
|
Without an Accountable Plan |
With an Accountable Plan |
|
Reimbursements count as taxable income to the employee |
Reimbursements are tax-free to the employee |
|
Business pays payroll taxes on the amount |
No payroll taxes on reimbursements |
|
Employee may not be able to deduct the expense |
Business gets a full deduction |
|
Poor documentation can lead to IRS issues |
Formal plan provides audit protection |
Especially after the 2017 Tax Cuts and Jobs Act (TCJA) eliminated miscellaneous itemized deductions for employees, having a proper plan in place is more important than ever.
Which Expenses Can Be Reimbursed?
The IRS allows a wide range of expenses to be reimbursed under an accountable plan. These include:
Mileage and travel expenses (e.g., hotels, flights, meals while traveling)
Business use of a personal cell phone
Home office expenses (if employees work remotely)
Tools and supplies
Professional licenses or continuing education
Client entertainment (subject to current deductibility rules)
Note: Meals and entertainment must still meet the 50% deductibility test, and entertainment expenses (e.g., tickets to events) are largely nondeductible.
What About Owners?
Yes, S corporation shareholders-employees and partners in partnerships can also benefit from an accountable plan.
For S corp owners, this is especially useful for:
Home office reimbursements
Personal vehicle mileage
Cell phone use
Internet costs
Rather than the S corp paying these expenses directly (which can lead to classification issues), the owner pays personally, then gets reimbursed tax-free under the accountable plan.
Caution: Owners must be treated as employees of the business and follow the same rules as other employees.
How to Set Up an Accountable Plan
Setting up an accountable plan doesn’t require filing anything with the IRS, but you do need formal written documentation. Here’s how to get started:
Draft a written policy – State the purpose, types of reimbursable expenses, documentation required, and deadlines.
Track expenses properly – Employees (including owners) must submit timely receipts and mileage logs.
Reimburse within a reasonable period – Typically 30–60 days after the expense is incurred.
Monitor and enforce – Require employees to return any excess advances within a set time frame.
Example language in the policy might include:
“Employees must submit receipts and an expense report within 60 days of incurring the expense. Any excess reimbursements must be returned within 120 days.”
Common Mistakes to Avoid
Treating the plan informally without documentation
Paying flat stipends (e.g., $100/month for cell phone use) without requiring substantiation—this is taxable!
Failing to require receipts or mileage logs
Not tracking excess reimbursements
These mistakes can trigger IRS scrutiny and lead to tax penalties, reclassification of reimbursements as wages, and loss of deductions.
Real-World Example
A small construction company has four employees who regularly drive to job sites. Instead of giving them a $200 monthly stipend (which is taxable), the owner sets up an accountable plan. Now, employees log mileage, and the company reimburses at the IRS standard mileage rate (67 cents per mile in 2024). The company deducts the reimbursement, and employees receive it tax-free.
Result? Lower payroll taxes and better compliance.
Summary
An accountable plan is a powerful tool to maximize tax deductions while keeping reimbursements tax-free for your team. It’s fully legal, easy to implement, and provides cleaner books and audit protection. Whether you’re a solo S corp owner or have a growing team, setting up an accountable plan is a smart, strategic move.
Need help creating a compliant accountable plan for your business?
Our team of enrolled agents and tax professionals can build a custom plan that fits your needs and keeps the IRS happy. Sign up today for a free discovery call.