Jovan Johnson, MBA, CFP®, CPA/PFS
Small business owners commonly use personal funds to cover business expenses, especially those related to a home office. For instance, you might use personal funds to pay for internet that supports both your business and personal use. This can get complicated, particularly if you’re an S Corp owner, since tracking these expenses involves additional steps. One effective way for S Corp owners to manage these costs and maximize their tax deductions is by using an accountable plan.
An accountable plan enables S Corp owners to accurately track and reimburse themselves for business-related expenses, including home office costs, without these reimbursements being taxable. Additionally, these reimbursements can be classified as deductible business expenses. Without such a plan, any reimbursements from your S Corp might be considered taxable income. In this article, we will explore how to use an S Corp accountable plan to effectively deduct home office expenses.
Understanding an S Corp Accountable Plan
An accountable plan allows S Corp owners to reimburse themselves from the business for business-use or mixed-use purchases made using personal funds. It is common to reimburse home office expenses through an accountable plan. These reimbursements become a deductible business expense, lowering your tax liability. Additionally, you do not have to report these payments on your personal income taxes.
These plans are particularly beneficial for mixed-use purchases (both personal and business use). For example, imagine you have a home office and spend $2,000 per month on rent. If your office space makes up 25% of the total square footage of your home, you can use an accountable plan to reimburse yourself for 25% of the rent. This means getting $500 tax-free from your company to pay for your rent each month, and your business can write that off as an expense.
IRS Requirements for an S Corp Accountable Plan
To take advantage of the benefits of an accountable plan, you must follow IRS requirements. Here are a few common rules to consider when using an S Corp accountable plan:
- There must be a legitimate business purpose for the expense.
- Keep documentation of the expense and the business purpose for the expense.
- If you accidentally reimburse yourself for more than you should have, make sure to return any excess reimbursement.
Consider working with a CPA or qualified tax professional to ensure you are fulfilling these requirements.
Eligible Home Office Expenses for an S Corp Accountable Plan
Many expenses qualify for an accountable plan, but for this article, we will focus on different home office expenses. Below is a brief list of home office expenses that may qualify:
- Alarm and Security Systems
- Home Office Cleaning
- Rent
- Repairs and Maintenance
- HOA Fees
- Mortgage Interest
- Property Taxes
- Utilities
- Insurance
- Internet
- Phone
Please note that you must reduce the amount of your itemized deduction for property taxes and mortgage interest by the amount of reimbursement you receive from your S Corp for these items. Consult a CPA or tax professional before implementing an S Corp accountable plan to understand the tax implications.
Setting Up and Managing an S Corp Accountable Plan
I recommend starting with creating a monthly employee expense report. In this report, you will track the business-use percentage of business purchases made using personal funds. List all home office expenses and other expenses (e.g., business mileage) that have some business use on the spreadsheet. For home office expenses, calculate the “business use percentage” by dividing the square footage of the office area by the total square footage of the home.
Multiply the total of these expenses by the business use percentage to determine the amount to be reimbursed. Total up all the business expenses listed on the form, including the home office amount, and transfer money from your business account to your personal account to reimburse yourself for the business-use portion of the expenses each month.
In your bookkeeping software, code this transaction as an employee reimbursement. This will notify your tax preparer that this is a tax-deductible expense and not included as taxable income on your personal tax return.
Additionally, make sure to keep receipts and other documentation of expenses and business purposes for the expenses.
Final Thoughts
Accountable plans provide S Corp owners with a flexible method to reimburse themselves for business expenses paid with personal funds in a tax-efficient manner.
Using an S Corp accountable plan to deduct home office expenses is a smart strategy for maximizing your tax benefits as an S Corp owner. By carefully tracking your expenses, calculating the business-use percentage, and following IRS guidelines, you can ensure that your reimbursements are tax-free.
However, it is critical to set up the plan correctly. If not done properly, you could miss out on tax savings opportunities or, worse, end up owing penalties to the IRS.
Working with a CPA or tax professional can help you navigate the complexities and ensure compliance. By leveraging an accountable plan, you can reduce your tax liability and ultimately retain more of your hard-earned money.
Would you like to learn more about whether an S Corp accountable plan is the right fit for your business? If so, please feel free to book a free consultation with us.
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Disclosures
None of the information provided is intended as investment, tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Piece of Wealth Planning LLC does not promise or guarantee any income or particular result from your use of the information contained herein.
