August 10, 2020
Business Accountable Plans: Do I Need One?
So much has changed in taxes over the last two years, it is hard to keep up.
For those of you that are long-term S-Corporation owners, this may be news for you. However, if you are new to the benefits of being an S-Corp, this is a great opportunity to increase your business validity, educate yourself on best practices, and ensure compliance.
The changes in the Tax Cuts and Jobs Act of 2017 now make S-Corp owners have a system to reimburse their employees/owners' business expenses they pay out-of-pocket. The solution is a “Business Accountable Plan.” This is a major change to the way it was done before – reporting your yearly out-of-pocket expenses to your accountant just before completing your tax return. Failing to have the proper paperwork in order – and following the process – could result in your out-of-pocket business expenses being disallowed by the IRS… costing you big bucks!
A Business Accountable Plan is a legal document to keep with your articles of incorporation. It details the expenses an employee may pay out of personal funds, and how they are to be repaid to that employee. This also includes reimbursement for your Business Use of Home if applicable. Anyone who has ever worked for another company as a W-2 employee, you have followed this process whenever you have filled out an expenses report. Don’t worry – we are here to help you get everything in order.
Here are some helpful tips to ensure you are on the right path:
- 99.9% of the time use your business checking account or credit card to make any purchases related to your business. Avoid co-mingling of funds.
- Sign a Business Accountable Plan to ensure you have the proper paper trail on how you will be reimbursed from your company.
- Submit timely information on personal funds – used for business expenses – to your accountant
- Maintain receipts for all business-related transactions
- Get reimbursed TAX-FREE on your next payroll cycle
Number 5 is the beauty of the Business Accountable Plan. Instead of claiming personal expenses as a tax deduction at the end of the year, you get your expenses reimbursed to you on your next payroll. Even better: these payments are tax-free and still count as business deductions. Aside from the extra cash flow of being reimbursed instead of a tax deduction later, your business is now compliant. The IRS is happy, and you are running just like the big corporations.