Business entities structured as S Corporation must reimburse its employees, including shareholders employees, for any business expenses paid and/or incurred during the tax year before the close of the S Corporation books. Business expenses must be reimbursed under an Accountable Plan.
What is an Accountable Plan?
An accountable plan is a written agreement between the S Corp and its employee(s) to process the business expenses reimbursement on an agreed schedule. Under IRC Section 1.62-2(C)(2), an Accountable Plan allows a business to reimburse an employee for expenses incurred in connection with the performance of duties for the business. Accountable plans provide a structured and legal way to deduct reimbursements for necessary expenses that would not typically be deductible by shareholders and/or employees on their personal tax return due to the change in the tax code with the Tax Cuts and Job Act. As long as the S-Corp and the shareholder/employees follow the accountable plan’s rules, the reimbursements are counted as valid business deductions, and the reimbursements are tax-free to the shareholder/employee.
What business expenses can be reimbursed by the S Corporation?
These are the most common business expenses incurred by an Employee shareholder; home office use for business, mileage or business-use portion of automobile expenses, and personal cell phone and internet use for business.
How do I reimburse myself as a Shareholder?
S Corporation need to calculate the amount pertained to any of the expenses and pay it directly from the business account into your/the employee personal account.
- For home office use of business, we recommend using the IRS simplified method. The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.
- For mileage or business-use portion of automobile expenses, multiply the business mileage x standard mileage rate. Standard mileage rate for 2024 is $0.67 per mile.
- Personal cell phone and internet use for business, calculate total cost for the year and then allocate the business use portion to be reimbursed by the S Corp.
Remember that as an S corporation owner, you are both a shareholder and an employee. Therefore, when you are being reimbursed you are being reimbursed as an employee and not as a shareholder.
Michael Zachary, EA CPHRC
Taxville Financial LLC