Running a business means paying for things before anyone ever thanks you for it. Gas in the car. Internet at home. A cell phone that never stops ringing. A portion of your house quietly turning into an office. Most business owners feel these costs immediately, but very few understand how the IRS wants them handled.
That confusion costs real money.
I’ve had countless conversations that start the same way. A business owner tells me they have been paying for business expenses personally for years. They assumed it all “washed out” at tax time. Then I ask one question:
“Do you have an accountable plan?”
The silence that follows usually tells me everything I need to know.
An accountable plan is not a loophole. It’s not aggressive or even optional if you want to do this right. It’s simply the IRS-approved way for a business to reimburse its owner or employees for legitimate business expenses without turning those reimbursements into taxable income.
Once you understand how it works, it becomes one of the cleanest and most powerful tax strategies available to closely held businesses.
Why the IRS Cares About Reimbursements
The IRS draws a very bright line between compensation and reimbursement. If you take money out of your business without the proper structure, the IRS assumes it is pay. Pay means income. Income means tax.
This is where most business owners get tripped up. They reimburse themselves casually, move money from one account to another, and label it “expense reimbursement” and hope for the best.
Hope is not a strategy.
Without an accountable plan, the IRS treats those payments as wages in an S-Corp or taxable distributions in other structures. That means payroll tax exposure, income tax exposure, and unnecessary friction if the return is ever examined.
An accountable plan changes that outcome entirely.
What an Accountable Plan Actually Is
At its core, an accountable plan is a written reimbursement policy. It outlines which expenses the business will reimburse, how those expenses must relate to the business, and how they must be documented.
The IRS requires three things. The expense must have a clear business connection. It must be substantiated with records. Any excess reimbursement must be returned.
When those rules are followed, the reimbursement is not income. It does not appear on your W-2 and it does not trigger payroll tax. Nor does it increase your adjusted gross income.
Instead, the business gets the deduction, and you get your money back tax-free.
Understanding Business, Personal, and Mixed-Use Expenses
Not every expense belongs inside an accountable plan. Some things are purely business. Others are purely personal. The real opportunity lives in the middle.
Mixed-use expenses are the ones most business owners pay for personally but use partly for work. These are the expenses accountable plans were designed for.
Your home is the easiest example. Mortgage interest, rent, property taxes, insurance, utilities, and maintenance all exist whether you run a business or not. When a portion of that home is used regularly and exclusively for business, the business owes you for that use. Square footage determines the percentage. The accountable plan determines the reimbursement.
Cell phones fall into the same category. Unless you carry two phones, one personal and one business, your phone is mixed-use. The moment a personal text comes through, it stops being 100 percent business. An accountable plan allows the business to reimburse you for the business portion without creating income.
Internet access works the same way. The business benefits from it every day, even though the bill is in your name. The accountable plan bridges that gap cleanly.
Vehicles are another major area. If you own your car personally and use it for business, the company owes you for that use. Mileage tracking establishes the business portion. The accountable plan governs the reimbursement.
Why This Matters So Much for S-Corp Owners
Accountable plans show up most often in S-Corps for a simple reason. As an S-Corp owner, you wear two hats. You are an investor and an employee.
Investors do not get reimbursed for expenses. Employees do.
When you reimburse yourself under an accountable plan, you are acting as an employee. That distinction matters. It is why the reimbursement avoids payroll tax and from an accounting (and compliance) perspective the deduction stays at the corporate level. It is also why this strategy fits so naturally alongside reasonable salary planning.
LLC owners can also use accountable plans, especially when the LLC is taxed as an S-Corp. Even single-member LLCs benefit when planning ahead and documenting reimbursements correctly.
How Often Reimbursements Should Happen
In a perfect world, reimbursements happen quarterly. Memory fades quickly. Receipts disappear. Mileage logs get sloppy.
Quarterly reimbursement keeps things clean and defensible. It also allows proper tax planning throughout the year. When I run projections for clients, I need to know what those reimbursable expenses look like so we can assign accurate tax obligations to the remaining income.
Many business owners wait until tax time and do it once a year. That works, but it is not ideal. The more frequent the process, the stronger the paper trail.
How the Money Actually Moves
The mechanics are simple. The documentation is what matters.
You calculate the reimbursable amount based on the accountable plan. The business transfers the money to your personal account or writes a check. The reimbursement is recorded properly in the books. No payroll entry is created. No tax is withheld.
Clean. Simple. Defensible.
The mistake I see most often is business owners doing the transfer without the policy. The money moves, but the protection does not exist.
Why the Written Plan Is Non-Negotiable
This is the part many people skip. The accountable plan must exist in writing. It must outline the rules. It must be adopted by the business.
This is not busywork. This is what separates tax-free reimbursement from taxable compensation.
The plan explains business connection, substantiation requirements, reimbursement timing, and return of excess payments. It creates consistency, credibility, and instant protection.
Courts have repeatedly sided with the IRS when accountable plans were missing or poorly documented. The absence of a plan turns every reimbursement into income.
Common Mistakes That Trigger Problems
The biggest mistake is assuming intent matters more than documentation. It doesn’t.
Another common issue is overreaching. Trying to reimburse personal expenses that lack a business connection undermines the entire plan. Reasonable, supportable percentages keep the strategy strong.
Poor recordkeeping creates problems too. Receipts, mileage logs, and calculations do not need to be fancy. They do need to exist.
How This Fits Into a Bigger Tax Strategy
An accountable plan is not a standalone tactic. It works best when paired with the right entity structure, having a reasonable salary and clean bookkeeping.
It reduces taxable income without increasing audit risk. In addition, it improves cash flow while respecting the IRS rules and guideline — instead of testing them.
When implemented correctly, accountable plans quietly move money from taxable buckets to tax-free ones. That is the kind of strategy that compounds over time.
Pulling It All Together
If you pay for business expenses personally and do not have an accountable plan, you are likely paying more tax than you need to. Not because the IRS is unfair, but because the rules were not followed.
An accountable plan is how the tax code intended reimbursements to work. It rewards structure, provides clarity, and rewards business owners who treat their company like a company — and not a personal piggy bank.
Once this is in place, it becomes routine. Quarterly reviews. Clean transfers. No surprises. That peace of mind alone is worth the effort.
Welcome to the New Age of Accounting. Let’s begin.
P.S. If you found this article helpful, you’ll love my new book S-Corp Mastery: How Smart Business Owners Maximize Tax Savings & Build a Lasting Legacy. It’s now live and available in a sleek, easy-to-read PDF version. Grab your copy here
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
