What Is an Accountable Plan and How to Use It?
Many (if not most) small business owners pay more in taxes than they need to. They miss deductions, mix personal and business expenses, or avoid legitimate write-offs because they're worried about audits.
BUT you don't have to choose between saving money and staying compliant. Two smart tax strategies, accountable plans and home office deductions, can put thousands back in your pocket each year when you follow the rules correctly.
But wait, what is an accountable plan? This guide walks you through that, as well as how to make it work with home office deductions, showing you what qualifies, what documentation you need, and how to implement them without triggering IRS scrutiny.
What IS an Accountable Plan?
An accountable plan is a formal system that lets you reimburse employees (or yourself, if you're taxed as an S-corp or C-corp) for business expenses without that money counting as taxable income.
That's great because it means paying for legitimate business costs with pre-tax dollars.
The employee doesn't pay income tax on the reimbursement, and the business still gets the full deduction.
For example, let's say you drive your personal car to meet clients or buy office supplies at Staples. Instead of paying for these out of pocket with your after-tax money, your business reimburses you through an accountable plan. You get your money back tax-free, and your business deducts the expense.
This works for sole proprietors with employees, partnerships, S-corps, and C-corps. The specific mechanics vary slightly by business structure, but the core benefit is the same.
You get to convert personal expenditures into legitimate business deductions without creating taxable income for the employee.
What Are the Must-Have Accountable Plan Rules?
The IRS requires you to follow three rules for your reimbursements to qualify as an accountable plan. If you miss them, your reimbursements become taxable wages.
Business Connection
Every expense you reimburse must have a clear business purpose. The employee needs to incur the cost while performing services for your company.
This means:
Driving to client meetings or job sites qualifies
Buying equipment or supplies for work projects qualifies
Traveling for business conferences or training qualifies
Commuting from home to your regular office doesn't qualify
Personal meals or entertainment don't qualify
Expenses that benefit you personally don't qualify
The business connection needs to be real and defensible. If the IRS asks why you reimbursed an expense, you should have a clear answer that ties directly to your business operations.
Substantiation
You need documentation for every reimbursed expense. Receipts, invoices, mileage logs, basically whatever proves that the expense happened and that it was business-related.
Your documentation should include:
The date and amount of the expense
Where you spent the money (vendor name)
The business purpose of the expense
For meals: who attended and what you discussed
For mileage: start and end locations, miles driven, business purpose
Submit this documentation to your business within a reasonable timeframe. The IRS considers 60 days reasonable. Waiting until the end of the year to submit a shoebox full of crumpled receipts isn't a great idea. Digital copies also work fine as long as they're clear and complete.
Return Excess Amounts
If your business advances money for anticipated expenses, employees must return any unused portion within a reasonable time period.
Let's say your business gives you $500 for a business trip, but you only spend $420. You need to return that $80. Usually, you should return excess reimbursements paid or incurred within 60 days of the expense period ending.
What an Accountable Plan Is NOT
Accountable plans follow strict IRS rules. If you treat them as anything other than a legitimate reimbursement system, you probably won't like the taxes and penalties. Namely:
This isn't a loophole to pay yourself tax-free: You can only reimburse actual business expenses you've already paid for.
You can't reimburse personal expenses: Taking your family to dinner doesn't become a business meal just because you route it through an accountable plan, and groceries for your house aren't office supplies.
Documentation isn't optional: You can't submit expenses without receipts or skip the business purpose explanation because it seems obvious to you.
Mistakes can convert your accountable plan into a nonaccountable plan, which means that the IRS taxes all reimbursements as wages.
How to Set Up Your Accountable Plan
To set up your accountable plan, you need a written policy, a submission process, and consistent record-keeping.
Create a Written Policy
Write down your accountable plan rules. This document should explain:
What types of expenses qualify for reimbursement
How employees submit expense reports
What documentation you require
Your timeline for submission and reimbursement
The process for returning excess advances
A clear, two-page document works fine. You just need something in writing that shows you established rules before reimbursing expenses.
Set Up Your Submission Process
Decide how employees will submit expenses. For example, you can use an Excel spreadsheet template or an expense tracking software like Expensify or QuickBooks.
Whatever method you choose, make sure it captures the required information, including the date, amount, vendor, and business purpose. Your employees should attach receipts or other documentation to each submission.
Keep Consistent Records
Store all expense reports, receipts, and supporting documentation in an organized system. For most small business owners, this means digitally. Keep these records for at least three years, but seven years is safer if you want extra protection against potential audits.
Your Accountable Plan and Home Office Deduction
You qualify for the home office deduction when you use a specific area of your home exclusively and regularly for business. Both of these words matter:
Exclusive use means you use that space only for business. A spare bedroom that's fully dedicated to your office qualifies, but a corner of your living room where you work at a desk but also watch TV doesn't qualify.
Regular use means you work in that space consistently, not occasionally. You don't need to work there every single day, but it should be your primary business workspace. Working from your home office three days a week qualifies, but working there once a month when you feel like it doesn't qualify.
The space must also be your principal place of business. For most small business owners, this means you do the majority of your work there.
If you primarily work at client sites but do all your administrative work, scheduling, and bookkeeping from home, your home office still qualifies as your principal place of business.
You can calculate your home office deduction using either the simplified method or the regular method. You choose which one to use each year when you file your small business taxes.
The Simplified Method
The IRS created this option to reduce paperwork. You multiply your office square footage by $5, up to a maximum of 300 square feet.
In other words, a 150-square-foot home office gets you a $750 deduction. However, a 300-square-foot office maxes out at $1,500. Even if your office is 400 square feet, you can only claim 300 square feet under the simplified method.
Business owners with very small offices (under 200 square feet) and renters with low housing costs usually benefit the most from this approach.
The Regular Method (Actual Expenses)
The regular method lets you deduct your actual home office expenses, proportionate to the percentage of your home used for business.
You can deduct portions of:
Mortgage interest or rent
Property taxes
Homeowners insurance
Utilities (electricity, gas, water, trash, internet)
Home repairs and maintenance
Depreciation (for homeowners)
This method requires more tracking, but usually gives you a larger deduction. You'll need to keep records of your home-related expenses throughout the year and calculate what percentage of each expense relates to your office space.
AKA, if your office takes up 10% of your home, you can deduct 10% of these expenses.
How Your Accountable Plan and Home Office Deduction Work Together
S-corp owners can combine their accountable plan and home office deductions to enjoy some tax benefits. Your S-corp establishes an accountable plan, then reimburses you for home office expenses based on the regular method calculation.
You calculate your business percentage, track your eligible expenses (rent or mortgage interest, utilities, insurance, repairs), and submit a monthly expense report to your S-corp.
Your S-corp reimburses you through the accountable plan, giving you tax-free reimbursement, and the S-corp deducts the full expense.
For example, you own an S-corp and work from a 250-square-foot office in your 2,500-square-foot home (10% business use). Your monthly expenses include $1,800 mortgage payment (with $1,200 in interest), $200 utilities, and $100 insurance.
Your monthly home office expenses are: $150 mortgage interest + $20 utilities + $10 insurance = $180.
Annually, that's $2,160 in legitimate business expenses your S-corp can reimburse you for through an accountable plan.
Get Fresh and Clear Tax Strategies for Your Small Business
Accountable plans and home office deductions are just two of dozens of legitimate tax strategies available to small business owners. At Desi Tax, we see MANY business owners miss opportunities just because they don't know what's possible or how to implement these strategies correctly.
When you become our client, we'll work with you throughout the year to identify deductions, optimize your business structure, and implement strategies that reduce your tax burden legally and sustainably.
Ready to stop overpaying on taxes? Learn more about our tax planning and bookkeeping services or schedule a call to see how much you could be saving.
