An S corp accountable plan is a formal document that allows an S corp to reimburse its employees, including shareholder-employees (owners), for business expenses they personally incur. The reimbursement is tax-free to the employee and deductible for the S corp. This plan must meet the IRS criteria for accountability, which is designed to ensure that the reimbursed expenses are legitimate business expenses and are not treated as additional taxable income to the employee.

Here are the key criteria that an accountable plan must meet:

1. Business Connection: Expenses reimbursed under the plan must have a business connection; they must be expenses the employer could deduct on its own tax return had the business paid them directly. Common examples include travel, meals, cell phone, and home office expenses.

2. Substantiation Requirement: Employees or shareholder-employees (owners) must provide the S corp with evidence of these expenses, including the amount, time, place, and business purpose, within a reasonable time frame. This generally means providing receipts, logs, or other detailed documentation to support each expense. Best practice is to provide these within 30 days of the expense.

3. Return of Excess Amounts: If the business reimburses more than the supported expenses, the excess amount must be returned to the S corp within a reasonable period. If the excess funds are not returned, it becomes taxable income to the employee.

3 benefits of using an S corp accountable plan include:

• Tax Minimization: Reimbursements made under an accountable plan are not reported as income to the employee, thus not subject to payroll taxes or income taxes. For the S corp, these reimbursements are deductible business expenses, which reduce the business’ taxable income. 

• Compliance: Having an accountable plan helps ensure that reimbursements are handled consistently and according to clear IRS guidelines, which can be beneficial in case of an audit. An IRS agent will likely ask to see your business’ accountable plan

• Employee Satisfaction: Such plans increase employee satisfaction and morale as they ensure employees are not out-of-pocket for business expenses.