TLDR: Many business owners pay for company expenses with personal funds and transfer money back to themselves to "get even." Without the proper documentation, the IRS can treat those transfers as taxable income. An Accountable Plan is the formal strategy that turns those transfers into tax-free reimbursements.
Key Highlights:
It is a scenario every entrepreneur knows: You are at a client dinner or buying a new laptop, and you reach for your wallet. You realize you left the company card at the office, so you pay with your personal credit card.
Later that week, you log into your business banking portal and transfer the exact amount from the business account to your personal account. In your mind, you are just paying yourself back.
To the IRS, however, that transfer looks suspicious. Without a formal set of rules, they often treat checks written to the business owner as taxable income (wages or dividends), rather than reimbursements. This means you could end up paying taxes on money that was covering a business cost.
Enter the "Accountable Plan"
To protect yourself and your business, adopt an Accountable Plan. This is not a complex IRS form you file; it is an internal policy that dictates how expenses are reimbursed.
When you have an Accountable Plan in place, the reimbursement is a "wash." The business gets to claim the tax deduction for the expense, and the money deposited into your personal account is 100% tax-free. It does not appear on your W-2, and it does not have to be claimed as income on your personal tax return either.
The Three Rules of the Road
You cannot just say you have a plan; you have to follow the IRS guidelines. To qualify as an Accountable Plan, your reimbursements must meet three criteria:
Business Connection: The expense must be a legitimate business cost incurred while performing your job. You cannot reimburse yourself for your morning commute or your personal gym membership.
Substantiation (The Receipt Rule): You must prove the expense happened. This means submitting receipts to the company within a reasonable time frame (typically 60 days). As we warned in Why Ignoring Bookkeeping Can Hurt Your Business, waiting until the end of the year to sort through "crumpled receipts" is a recipe for disaster. Relying on credit card statements is rarely enough; the IRS requires the actual receipt showing what was bought.
Return of Excess: If the company gives you an advance of $1,000 for travel, but you only spend $800, you must return the extra $200. You cannot keep the change tax-free.
Why S-Corp Owners Need This Most
If you recently made the switch we discussed in Is It Time for an S-Corp?, an Accountable Plan is mandatory.
In an S-Corp, you are an employee. If you reimburse yourself informally, the IRS may reclassify those payments as wages. This triggers the 15.3% payroll tax we are trying to avoid. An Accountable Plan shields those reimbursements from payroll taxes, keeping your strategy efficient.
Final Thoughts
Reimbursing yourself shouldn't be a taxable event. By formalizing your process with an Accountable Plan, you ensure that business expenses remain deductible and that your personal reimbursements remain tax-free. It is a simple piece of "internal hygiene" that saves significant money during an audit. Contact us to help draft an Accountable Plan policy that fits your business.