What is an Accountable Plan for Your Childcare S-Corp?

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What is an accountable plan, and how can it help you maximize tax deductions for your childcare S-corp? We’re glad you asked! In the following article, we provide an overview of an accountable plan for S-corps, including what purpose it serves, why it is beneficial to employers and employees, and what you need to do to implement one for your Early Childhood Education business. Read on to learn more.

What Is an Accountable Plan?

In simple terms, an accountable plan is a reimbursement program approved by the IRS which allows a business to reimburse employees for business expenses they incur on the job. An accountable plan offers benefits to you, the employer, and your employees and can be implemented under specific guidelines issued by the IRS, which we will discuss below.

First, let’s take a look at why an accountable plan has become necessary for S-corporation owners.

Implications of the Tax Cuts and Job Act

Before the Tax Cuts and Job Act (TCJA) of 2017 was passed, W-2 employees could deduct unreimbursed business expenses paid from their personal funds as miscellaneous itemized deductions on their personal income tax returns. However, the TCJA eliminated most miscellaneous itemized deductions, including unreimbursed business expenses, through 2026.

In order to achieve a similar end, accountants have since created the accountable plan, which allows S-corporation owners/employees to deduct reimbursed business expenses by passing them through the business. In this manner, the business is able to deduct the reimbursed amounts as if the business itself incurred those expenses to begin with.

Benefits of An Accountable Plan

An accountable plan is a win-win for you, the business owner, and for your employees. With an accountable plan, reimbursements for business expenses are not considered compensation to employees, and thus do not increase an employee’s taxable earnings. At the same time, the reimbursements are tax-deductible to the business. Provided you adhere to the following guidelines, setting up an accountable plan for your Early Childhood Education business is a no-brainer.

IRS Guidelines for An Accountable Plan

An accountable plan must meet three specific requirements outlined by the IRS:

  1. The expenses must have a business connection. They must be regarded as purchases for legitimate business purposes, such as:
    • Travel expenses (either actual or per diem)
    • Gas or mileage expenses (either actual or per diem)
    • Tools and supplies
    • Home office, including depreciation
    • Cell phone
    • Internet
    • Training and professional development
    • Dues, subscriptions, and professional licenses
  2. The expenses must be substantiated within a reasonable period. As such, the employer must collect documentation that shows the amount, time, place, and business purpose of the expense. Documentation may include an account book, receipt, bill, credit card statement, and the like.
  3. The employee must return any money not spent to the employer, also within a reasonable period. The IRS allots 60 days for accounting of expenses and 120 days for excess reimbursements as a guideline for a “reasonable period.”

Implementing an Accountable Plan

Here’s the bottom line: Without an accountable plan in place for your S-corp childcare business, the latest tax law requires that reimbursements be reported on the shareholder/employee’s W-2 as taxable income. And since the reimbursements are no longer able to be deducted as miscellaneous itemized deductions, the shareholder/employee would have additional income to report without any additional tax deductions—a no-win situation!

Implementing an accountable plan is easy, especially with the help of a CPA. The experts at Honest Buck Accounting can help you set up an accountable plan for your S-corp Early Childhood Education business so you and your employees can minimize the taxes you ultimately owe. Make this the year you move forward with an accountable plan in place!

Honest Buck Accounting provides expert-level accounting services for child care organizations, daycares, pre-schools, and non-profit schools. Contact us today to learn more about our services.


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