Accountable plans: how an S corporation reimburses its owner
An S corporation owner who pays business costs personally usually cannot deduct them. The corporation can reimburse them tax-free instead, but only through a plan that meets three specific requirements.
Owners of S corporation practices pay business expenses personally all the time: the home office used for telehealth sessions and notes, mileage to a second location or a school contract, a license renewal or a continuing education course paid on a personal card because it was convenient. Those are real business costs. The question is whose return they belong on.
Why the owner cannot just deduct them
An S corporation owner who works in the practice is an employee of it. Unreimbursed business expenses of an employee used to be a miscellaneous itemized deduction, and that deduction has not been available on the federal return since 2018. So an expense the owner pays personally and simply keeps a receipt for usually produces no federal deduction anywhere. It is not on the corporation’s return, because the corporation did not pay it, and it is not on the owner’s, because the deduction is not available.
The fix is for the corporation to reimburse the owner, and to do it under an accountable plan.
What makes a plan accountable
Treasury Regulation section 1.62-2 sets three requirements. The expense must have a business connection, meaning it was incurred performing services for the corporation. The employee must substantiate it to the corporation within a reasonable period, showing enough detail to identify the nature and business purpose of each expense, and for travel and vehicle use the amount, date, place, and business purpose. And any advance or reimbursement beyond the substantiated expenses must be returned within a reasonable period. The regulation includes a fixed-date safe harbor for what counts as reasonable timing, and a regular monthly or quarterly submission cycle keeps a plan comfortably inside it.
Reimbursements under an accountable plan are not wages. They are left off the W-2, carry no withholding or payroll tax, and the corporation deducts the expense. Reimbursements that fail the requirements are treated as paid under a nonaccountable plan, which makes them taxable wages to the owner. The difference between those two outcomes is almost entirely paperwork.
The home office
For therapists and other clinicians who see clients by telehealth or write notes at home, the home office is usually the largest item. The corporation can reimburse the business share of home costs, generally measured by the space used regularly and exclusively for the practice as a share of the whole home, applied to expenses such as rent or mortgage interest, utilities, insurance, and repairs.
Two points need care. For an employee, section 280A requires that the home office be for the convenience of the employer rather than a personal preference. That is easiest to support when the practice has no other space for the work done at home, or when the home office is where the practice’s administrative work actually happens. And if the home is owned, the business share can include depreciation, which comes back as taxable gain when the home is sold. That is a real consequence, and it is better decided knowingly than discovered at the sale.
Mileage, licensing, and the rest
Driving for business, such as between office locations or to a school or client site, can be reimbursed at the IRS standard mileage rate for the year, supported by a log of dates, destinations, purpose, and miles. Commuting from home to a regular office is not business travel, although a home office that is the principal place of business can change where business travel begins. License renewals, association dues, continuing education, and the business share of a personal phone are common reimbursable items when they are substantiated.
Health insurance follows a different rule
Health insurance premiums for a more-than-2-percent shareholder do not belong in an accountable plan. Under IRS Notice 2008-1, premiums the corporation pays or reimburses for that shareholder are included in the shareholder’s W-2 wages, generally without Social Security and Medicare tax, and the shareholder may then claim the self-employed health insurance deduction on the personal return. Treating the premiums as an ordinary expense reimbursement is a common error, and it tends to lose the deduction rather than improve it.
Setting it up so it holds
What holds up is a written plan adopted by the corporation that states what is reimbursable and the deadlines for submitting expenses and returning any excess, expense reports with receipts submitted on that schedule, and reimbursements paid from the corporate account to the owner and recorded as business expenses rather than as distributions. A plan like this works well in a practice that keeps its books monthly. It is much harder to reconstruct at year end from a stack of personal card statements.
An accountable plan is one of the first things worth setting up when a practice converts to an S corporation, alongside the owner’s salary and the treatment of distributions, because the three meet in the same year-end numbers. More is on our S corporation page and on our page for therapy practices.
Insights
Related reading
Setting a reasonable S corporation salary when you are the clinician
The clinician-owner is two employees in one chair, a provider and a manager. A defensible salary prices both jobs, and a group practice already holds the best comparable in its own payroll.
Why an S corporation distribution can be taxable
A distribution is not tax-free because the company had cash. It is tax-free because you had basis. Those are different questions, and only one of them is on the bank statement.
Quarterly estimated taxes for private practice owners
The penalty is not for owing at filing. It is for paying late during the year, and the safe harbors are written so that a practice with unpredictable income can still avoid it.
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