What Is an Accountable Plan?

What is an accountable plan, and how can it help you maximize tax deductions for your childcare S-corp? We’re glad you asked! If you’re wondering about the home deduction for childcare expenses, you’ll find helpful information here.

In this article, we provide an overview of an accountable plan for S-corps. Specifically, you’ll learn what purpose it serves, why it benefits employers and employees, and how to implement one for your Early Childhood Education business. So, read on to learn more.

How an Accountable Plan Works

In simple terms, an accountable plan is an IRS-approved reimbursement program. Essentially, it allows a business to reimburse employees for business expenses they incur on the job. (See IRS Publication 463 for official guidelines.)

As a result, an accountable plan offers benefits to you, the employer, and your employees. Moreover, you can implement one by following specific IRS guidelines, which we discuss below.

Now, let’s examine why S-corporation owners need an accountable plan.

Why S-Corp Owners Need an Accountable Plan

Before Congress passed the Tax Cuts and Job Act (TCJA) of 2017, W-2 employees could deduct unreimbursed business expenses. At that time, they claimed these as miscellaneous itemized deductions on their personal income tax returns.

However, the TCJA eliminated most miscellaneous itemized deductions through 2026. Unfortunately, this includes unreimbursed business expenses.

To achieve a similar tax benefit, accountants created the accountable plan. Consequently, this allows S-corporation owners/employees to deduct reimbursed business expenses by passing them through the business. In turn, the business then deducts the reimbursed amounts as if it incurred those expenses directly.

Benefits for Employers and Employees

An accountable plan creates a win-win for you, the business owner, and for your employees. Importantly, the IRS does not consider reimbursements for business expenses as employee compensation. Therefore, reimbursements do not increase an employee’s taxable earnings.

At the same time, the business can deduct these reimbursements from its taxes. Furthermore, if you follow the guidelines below, setting up an accountable plan for your Early Childhood Education business becomes an easy decision. Additionally, you can even claim a home deduction for childcare expenses through this plan.

IRS Requirements for an Accountable Plan

An accountable plan must meet three specific IRS requirements:

1. Business Connection

First, the expenses must have a business connection. In other words, the IRS must regard them as purchases for legitimate business purposes, such as:

• Travel expenses (actual or per diem)

• Gas or mileage expenses (actual or per diem)

• Tools and supplies

• Home office expenses, including depreciation

• Cell phone

• Internet

• Training and professional development

• Dues, subscriptions, and professional licenses

2. Timely Documentation

Second, employees must substantiate expenses within a reasonable period. Specifically, the employer must collect documentation showing the amount, time, place, and business purpose of each expense. For example, acceptable documentation includes account books, receipts, bills, and credit card statements.

3. Return of Excess Funds

Third, the employee must return any unspent money to the employer within a reasonable period. Generally, the IRS considers 60 days reasonable for accounting of expenses. Meanwhile, for returning excess reimbursements, the IRS allows 120 days.

The Cost of Not Having an Accountable Plan

Here’s the bottom line: Without an accountable plan for your S-corp childcare business, current tax law requires you to report reimbursements on the shareholder/employee’s W-2 as taxable income.

As a consequence, since employees can no longer deduct these reimbursements as miscellaneous itemized deductions, shareholders face additional reportable income. Unfortunately, they receive no additional tax deductions to offset it. Ultimately, this creates a no-win situation and eliminates the home deduction for childcare that many owners rely on.

How to Get Started

Fortunately, implementing an accountable plan is easy, especially with CPA assistance. In fact, the experts at Honest Buck Accounting can help you set up an accountable plan for your S-corp Early Childhood Education business.

As a result, you and your employees will minimize the taxes you ultimately owe. So, make this the year you move forward with an accountable plan in place!

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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.