Do you have a home office for your S-corporation? Deduct your expenses using an accountable plan
S-corporation shareholders are considered employees of their businesses, so unlike partners in a partnership, they can’t simply deduct unreimbursed business expenses directly on Schedule E as Unreimbursed Partnership Expenses, or UPE. Until the end of 2017, their only option was to deduct home office and other business-related expenses on Schedule A, where it was subject to the 2% of AGI threshold.
However, under the Tax Cuts and Jobs Act, signed into law in December, 2017, even this meager deduction is gone until 2025.
But if you set up an accountable plan for your S-corporation, everyone wins: the S-corporation gets a deduction, and you get a tax-free reimbursement.
To pass IRS muster, an accountable plan must meet three requirements:
- The expenses must have a business connection. The expenses must be incurred during the ordinary course of business. These can include mileage, meals with clients, and out-of-pocket travel expenses. They can also include expenses that are part personal and part business, such as home office expenses, cell phones, and home internet.
- There must be substantiation to support the deduction. This can be easily accomplished by submitting a detailed monthly or quarterly expense report with the relevant documentation attached. Apps like Expensify and ReceiptBank make this simple. Smartphone apps like MileageIQ and TripLog are great for tracking business driving.
- Any excess reimbursements over actual expenses must be repaid promptly. Any excess over actual expenses must be repaid within 120 days.
Result? Your S-corporation deducts the expenses, and the reimbursement to you is tax-free. Without an accountable plan in place, these reimbursements are taxable income, and should be reported on your W-2.
Setting up an accountable plan is quite simple. Here’s a sample agreement you can adapt for your business. Call our office for help in setting up an accountable plan for your business!