Tag Archives: sample accountable plan agreement

S-Corp Automobile Deduction

Who owns the vehicle matters!

You want your S-Corporation (S-Corp) to have a nice clean set of books, and the cleaner they are, the better.  Corporate payments of personal expenses either dirty up the accounting or can create a strong impression of impropriety.  The IRS is attracted to things that look suspect, which is an even better reason for you to make sure your S-Corp has a clean set of books.  So how does one go about deducting the expenses of a vehicle that is used by a S-Corp.  Well, the answer depends largely on who the vehicle is titled to.

Vehicle Titled In Corporation’s Name.  Corporations, S-Corps, and Partnerships may only claim actual expenses for vehicles.  Thus, your S-Corp may claim depreciation, fuel expenses, oil expenses, repairs, insurance, and so forth.  But what about mileage?  When the car is owned in the corporation’s name, it is not allowed to deduct mileage, just the actual expenses incurred for it’s use in business.

Vehicle Titled Personally.  To deduct the expenses of a vehicle that is owed personally by the business owner, the S-Corp can reimburse the employee expenses under an accountable plan or a non-accountable plan.  The expenses are deductible under either methodology, but the rules are different.

Accountable Plan
When an accountable plan is used, the business only reimburses expenses that are substantiated (proved) by receipts and other documentation.  The reimbursements are not taxable income to the business owner nor are they reported on their W-2.  What the owner needs to submit to the business depends on what expenses they will be reimbursed for.  In this post about S-Corp Home Office Deductions, we provide a sample accountable plan that will give you an idea of the reimbursement language.

  • Mileage Reimbursement.  The business can reimburse at the IRS standard mileage rate.  This rate includes allowances for depreciation (i.e. wear and tear), maintenance, repairs, gas, insurance, and a host of other things.  The proof the business owner would need to provide for reimbursement would be a mileage log.  This log would need to show the date, business purpose of the trip, miles driven and should be submitted to the business on a routine and timely fashion (e.g. once a month).  One important thing to note is that the standard mileage method only applies to passenger vehicles with a gross weight of less than 6,000 pounds.
  • Actual Expense Reimbursement.  The business can also reimburse for the actual expenses the business owner incurs.  The business does not have to reimburse for every expense, for example, you could reimburse gas and insurance and not tires and oil changes.  However, for any expenses the business does reimburse, it must have adequate proof.  Adequate proof means you need to see all the receipts for the expenses that will be covered.  In addition to the expenses, the owner also needs to supply the total vehicle mileage for the year as well as the mile log.  Why?  So it can determine the number of business miles and the number of personal miles to compute the percentage of business use.  This percentage is then applied to the total amount of expenses incurred to determine how much is reimbursed to the employee.

Non-accountable plan
If a non-accountable plan is used, then the business does not need to keep or see any vehicle records.  They can reimburse any amount, from below the IRS standard rate, or above the IRS standard rate.  They can reimburse for gas and insurance but not oil changes, or anything else that that it wants to pay for (that is vehicle related).  But under this method, all the reimbursements get included in the employee’s box 1 W-2 wages and are subject to income and employment tax withholding.  The non-accountable plan is less beneficial to the employee because of the inclusion of the amounts on their W2 as income.

S-Corp Home Office Deduction

Taking the home office deduction is fairly simple when you’re a self-employed individual and file Schedule C.  In those instances, you simply indicate on Form 8829 the percentage of your home that is used for work, the costs to maintain your space, and that amount will go on your Schedule C as a deduction.

If you are a member of a partnership or multimemeber LLC, then you use a similar calculation to the one listed above (see the worksheet on page 27).  However, you deduct the expenses as unreimbursed partnership expenses on Schedule E.

But what if you’re a member of a S-Corp?  Well, if you still want that home office deduction, just be prepared to do a few workarounds to get it.

25 years ago Congress enacted a law prohibiting the deduction of expenses related to the rental of a portion of one’s home to their employer.  The law was enacted in response to a Supreme Court decision [Feldman v. Commissioner].  The rental arrangement involved was viewed as an attempt to circumvent the purpose of Internal Revenue Code Section 280A, which limits deduction of expenses allocable to the business use of one’s home.

Given that office-in-the-home expenses are not allowable if the office is rented to one’s employer, an S Corporation shareholder-employee “could” deduct office-in-the-home expenses as miscellaneous itemized deductions.  But these deductions are of little or no value because of the 2% income floor imposed on Schedule A, and the add back of such deductions in computing alternative minimum taxable income.

Based on the above, the old workaround that was often used was:

  • create a rental property on Schedule E of the individuals return, and include a portion of all expenses (rent, mortgage interest, property tax, insurance, utilities, etc). You would then report an amount of income that’s equal to;
  • rent expense that you report on your S-Corp tax return. Those two amounts will offset (the rent deduction on your S-corp return and the rent income on your individual return); and you will be left with the home office deduction.

Well,  the IRS got tired of sifting through fake rental properties and instead recommends that the employee submit an expense report as part of what’s called an “accountable plan.”

So based on this guidance, here is the new way of deducting home office expenses if you are a member of a S-Corp:

  • Draft an accountable plan agreement for your company.  It will outline what expenses are eligible for reimbursement, how they will be paid, etc.  A sample plan can be found here, or you can create your own.
  • Calculate the percentage of your home that is used exclusively for business purposes.  Divide the square footage used for business by the total square footage of the home and multiply by 100.
  • Calculate the total amount of eligible reimbursable expenses (see Form 8829 above).  Multiply each amount by the percentage of business use calculated in the step above and enter the results on the expense form that you use for your accountable plan.
  • Prepare expense reports as the employee and turn them in to your company on a regular basis.  Attach receipts or other documentation to the form to substantiate them.
  • Cut the check from the business account and deposit it into your personal account. Attach a copy of the check to the form as documentation that these were paid.
  • Enter the amount of the payment into your S corporation’s records as a reimbursement for employee expenses. Post each expense claimed to the appropriate expense account so that these expenses may be deducted from the corporation’s income on its tax return.

And there you have it.  You have now created a tax-deductible business expense for the S-corp, and you don’t have to report the reimbursement as income.