How should you reimburse yourself for business expenses? The truth is the answer will depend on what kind of business you have. In this episode, Mike dives into reimbursing oneself for business-related costs and introduces an accountable plan; What is it and why you might need it? He also covers the four major requirements for this plan to ensure the IRS will accept reimbursements as legitimate.
This episode is a must-listen for business owners aiming to navigate the often tricky terrain of personal and business expense separation!
[00:25] Reimbursing Yourself As a Sole Proprietor or Single Member LLC
- How you reimburse yourself depends on how your business is organized.
- As a sole proprietor or single-member LLC, you simply take the deduction for the
- business portion of an expense on your Schedule C when filing your taxes.
- For mileage or home office expenses, report them on Schedule C. For others, like an 80% business-used cell phone, add them to Schedule C or transfer the cost from business to personal account and claim it.
[03:45] Reimbursing Yourself As A S-Corporation or C-Corporation
- Remember:Operating as an S-Corp means you’re an employee of the corporation.
- The IRS requires you to have an "Accountable Plan" in place.
- When you pay an employee, you pay them wages which are subject to both employment and income taxes. With a reimbursement we want to ensure employees (including you) do not get hit with taxes on reimbursements.
- An Accountable Plan lets owners and employees submit expenses for business reimbursement without it being taxable income.
[05:36] How to Set Up An Accountable Plan
- A written accountable plan is advised for clarity and ease during audits.
- It must adhere to four key principles:
- Business Connection
- Substantiation
- No Excess Payment
- Timeliness
- As part of our Tax Minimization Program we have a full section on the Accountable Plan and we discuss how to:
- 1. Adopt a Written Reimbursement Policy (Accountable Plan)
- 2. Create an Accountable Plan Template / Expense Report
- 3. Make the Reimbursement Payment
- Some common accountable plan expenses include home office, personal automobile usage, office expenses, travel, parking/tolls, business meals, tools, dues, licenses, cell phone/internet, and training.
[12:30] Closing Segment
- Make sure you set up and use the reimbursement system before year-end for timely expense recording!
Key Quotes
“How we reimburse ourself is going to depend on how our business is organized.” – Mike Jesowshek, CPA
“An accountable plan is just a fancy word for reimbursement policy…it’s a tool to make sure that reimbursement is being done according to law and that the IRS will accept it." – Mike Jesowshek, CPA
Podcast Host: Mike Jesowshek, CPA - Founder and Host of Small Business Tax Savings Podcast
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