Accountable Plans: One of the Most Overlooked Tax-Saving Tools for Small Business Owners

Many business owners are surprised to learn that they can be reimbursed for legitimate business expenses from their company — without those reimbursements being taxable income.

This is possible through something called an accountable plan.

Used properly, an accountable plan allows your business to reimburse you for out-of-pocket business expenses and deduct them at the business level — without you paying income or payroll tax on the reimbursement.

Used improperly, it can create audit risk, disallowed deductions, and even payroll tax exposure.

Here’s what accountable plans are, how they work, and why they can be a powerful tool for small business owners.

What Is an Accountable Plan?

An accountable plan is a formal reimbursement arrangement between a business and its employees (including owner-employees) that allows the business to reimburse business expenses tax-free.

To qualify, the plan must meet three IRS requirements:

1. Business connection — The expense must be ordinary and necessary for the business.

2. Substantiation — The employee must document the expense (amount, date, business purpose).

3. Return of excess — Any excess reimbursement must be returned to the business.

If these requirements are met, the reimbursement:

• Is deductible by the business, and

• Is not taxable income to the employee.

That means no income tax, no payroll tax, and no self-employment tax on the reimbursement.

Why Accountable Plans Matter for S Corporations

Accountable plans are especially valuable for S corporations.

Without an accountable plan:

• Many business expenses paid personally by the owner are not deductible at all, or

• They may be treated as taxable compensation or distributions.

With an accountable plan:

• The business reimburses the owner for legitimate expenses, and

• The reimbursement is not subject to payroll taxes or income tax.

This effectively allows business owners to shift certain expenses from nondeductible personal costs into deductible business costs — correctly and legally.

Common Expenses That Can Be Reimbursed

Some typical expenses that can qualify under an accountable plan include:

• Home office expenses (portion of rent, utilities, internet, insurance)

• Business mileage or vehicle expenses

• Cell phone and internet used for business

• Professional education and licensing

• Travel for business purposes

• Office supplies and equipment purchased personally

The key is that these must be business expenses, properly documented.

How Much Can an Accountable Plan Save?

Here’s a simplified example:

An S-corp owner incurs $15,000 per year in legitimate business expenses personally.

Without an accountable plan:

• Those expenses are often nondeductible personally

• Or reimbursed as taxable wages or distributions

With an accountable plan:

• The S-corp deducts $15,000

• The owner receives $15,000 tax-free

• Payroll taxes are avoided on that amount

That can easily save several thousand dollars per year in combined taxes.

What Makes an Accountable Plan “Valid”

To be respected by the IRS, an accountable plan should include:

• A written policy adopted by the company

• Clear procedures for submitting expenses

• Documentation requirements

• A process for returning excess reimbursements

It’s not enough to simply label reimbursements as “accountable.” The structure and behavior matter.

Common Mistakes

I see business owners get into trouble when they:

• Reimburse expenses without documentation

• Reimburse personal expenses that aren’t truly business-related

• Treat reimbursements as a way to pull cash out of the business

• Backdate plans without proper adoption or behavior

These mistakes can result in the IRS reclassifying reimbursements as taxable wages.

When Accountable Plans Are Not a Fit

Accountable plans are not always appropriate:

• For businesses without employees (depending on structure)

• For businesses with very low expenses

• For businesses unwilling to keep documentation

• When used to reimburse personal lifestyle costs

They are a tool — not a loophole.

Final Thought

An accountable plan is one of the simplest ways for small business owners to legitimately reduce their tax burden — but only when it’s implemented correctly.

It’s not about avoiding tax. It’s about ensuring that business expenses are treated as business expenses, not as personal income.

If you’re a business owner paying for business expenses personally, there’s a good chance you’re leaving money on the table.