Accountable Plans: Tax-Free Reimbursements for Business Owners

As a business owner who is also an employee, you may have to pay for business expenses out of your own pocket. If you reimburse yourself for these expenses through an accountable plan, you can avoid paying taxes on the reimbursements. 

Accountable plans have four simple rules: 

  1. The expenses must be business-related. 
  2. You must keep detailed records of your expenses. 
  3. You must pay the expense within a reasonable period of time (generally 60 days). 
  4. You must return any excess reimbursement to your business within a reasonable period of time (generally 120 days). 

To set up an accountable plan, simply create a policy that outlines the rules and requirements. Then, make sure to keep detailed records of your expenses and submit them for reimbursement on a timely basis. 

Examples of business expenses that you can reimburse yourself for through an accountable plan include: 

  1. Travel expenses 
  2. Meals and entertainment 
  3. Home office expenses 
  4. Car mileage 
  5. Professional dues 
  6. Training and education expenses 

To deduct home office expenses through an accountable plan, the business owner would simply need to pay themselves rent for their home office and keep detailed records of the expenses associated with the home office, such as utilities, mortgage interest, and property taxes. 

Here is a summary of the key benefits of accountable plans for business owners who are also employees: 

  1. Tax-free reimbursements for business expenses 
  2. Simple to set up and administer 
  3. Flexible and adaptable to meet the needs of your business 
  4. Can help you save money on taxes and get reimbursed for the business expenses you incur 

It is important to note that there are certain rules that business owners must follow in order to deduct home office expenses and vehicle expenses. Business owners should consult with a tax advisor to ensure that they are following all of the applicable rules 

An example of how an employee business owner can use an accountable plan is to enable them to deduct home office expenses and personal/mixed use vehicle expenses.  In this way taxable income is reduced for expenses they were not most likely not able to deduct previously. This can lead to a lower overall income tax burden for the business owner, even if they are not able to deduct all of their expenses. 

Additionally, if the business owner is able to reduce their taxable income enough, they may move into a lower income tax bracket. This can lead to even greater savings on taxes. 

Here is an example: 

  1. A business owner has $100,000 in taxable income before deducting any business expenses. 
  2. The business owner deducts $10,000 in home office expenses and $5,000 in vehicle expenses. 
  3. The business owner’s taxable income is now $85,000. 
  4. The business owner’s income tax bracket is now 24% instead of 26%. 
  5. The business owner saves $500 in taxes as a result of moving into a lower income tax bracket. 

Even though the business owner was not able to deduct all of their business expenses, they were still able to save money on taxes by using an accountable plan. 

If you are interested in learning more about accountable plans, please give our office a call to make an appointment at (404) 823-8233 or consult with your current accountant or tax advisor. 

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