Accountable Plans: One of the Most Overlooked Tax Strategies for Business Owners

At Shifflett & Philips, we are always looking for practical ways to reduce taxes without adding risk or complexity. One of the most effective and most underutilized strategies for closely held businesses is the accountable plan.

When properly structured, an accountable plan allows a business to reimburse employees (including owner-employees) for business expenses in a way that is fully deductible to the company and tax-free to the employee. No income tax. No payroll tax. Just clean, compliant tax savings.

What Is an Accountable Plan?

An accountable plan is an IRS-approved reimbursement arrangement governed by Treas. Reg. §1.62-2. It allows a business to reimburse employees for ordinary and necessary business expenses incurred in the course of their work.

When the rules are followed:

• The business deducts the reimbursement.

• The employee does not include the reimbursement in taxable wages.

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

This is very different from a flat allowance or stipend, which is generally taxable.

The Three IRS Requirements

To qualify as an accountable plan, all three of the following requirements must be met.

1. Business Connection

The expense must be incurred in the performance of services as an employee and must be ordinary and necessary under IRC §162.

2. Substantiation

The employee must provide adequate documentation, including:

• Amount

• Date

• Business purpose

• Receipts, where applicable

3. Return of Excess

Any reimbursement in excess of substantiated expenses must be returned within a reasonable period.

IRS safe harbors:

• Substantiation within 60 days

• Excess returned within 120 days

If any of these requirements are not met, the arrangement becomes a nonaccountable plan, and all reimbursements become taxable wages reportable on Form W-2.

Common Reimbursable Expenses

Typical expenses reimbursed through accountable plans include:

• Business mileage (at the IRS standard rate)

• Home office expenses (business-use percentage)

• Cell phone and internet

• Office supplies and equipment

• Travel and lodging

• Meals (subject to current limitations)

• Professional education and licensing

Flat allowances or stipends without substantiation do not qualify.

Why Accountable Plans Matter for S Corporations

Accountable plans are especially powerful for S corporations with owner-employees.

Under the Tax Cuts and Jobs Act, unreimbursed employee business expenses are nondeductible at the individual level for 2018–2025. That means:

• Without an accountable plan, the owner pays these expenses personally with no tax benefit.

• With an accountable plan, the corporation deducts the expense and the reimbursement is tax-free.

This does not replace reasonable compensation rules, but it is one of the cleanest ways to reduce payroll taxes for owner-employees.

While unreimbursed employee expenses are scheduled to return in 2026 as miscellaneous itemized deductions, accountable plans will remain the preferred structure due to:

• Payroll tax savings

• Reduction of adjusted gross income (AGI)

• Avoidance of the 2% AGI limitation

• Cleaner audit trail

Implementation Best Practices

To implement an accountable plan correctly, we recommend:

• Adopting a written plan document

• Clearly defining eligible expenses

• Establishing documentation standards

• Reimbursing on a regular basis (monthly or quarterly)

• Maintaining contemporaneous records

The most common compliance issues we see are:

• No written plan

• Poor or missing substantiation

• Reimbursing personal expenses

• Failure to return excess payments

These mistakes can convert a good plan into a taxable one.

Example: The Power of an Accountable Plan

Facts

• S corporation owner-employee

• $18,000 of annual business expenses paid personally

  (home office, mileage, phone, internet)

Without an Accountable Plan

• Expenses are nondeductible at the individual level

• No payroll tax savings

• The owner bears the full after-tax cost

With an Accountable Plan

• S corporation deducts $18,000

• Reimbursements excluded from Form W-2

• Payroll tax savings of approximately $2,750

  (15.3% combined employer/employee FICA, partially offset by wage base limits)

Result

• Same cash to the owner

• Lower payroll taxes

• Cleaner books and audit trail

Final Thoughts

Accountable plans are one of the simplest, lowest-risk ways to reduce taxes for closely held businesses, particularly S corporations with owner-employees.

When properly implemented, they create:

• Permanent payroll tax savings

• Corporate-level deductions

• Tax-free reimbursements

• Strong documentation for audit defense

At Shifflett & Philips, we routinely review accountable plans as part of our tax planning process to ensure they are properly structured, documented, and operated.

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