What is an accountable plan, and who is it for?
In this episode of Toni Talks, host Toni Covey, Director Of Professional Services, covers Accountable Plans. Who can have and participate in an accountable plan?
We’ve been flooded with this question, especially when it comes to how one can use this particular plan.
So, let’s get into it.
What Is an Accountable Plan?
An accountable plan is a plan to enable you to reimburse yourself and your employees from your business entity. The first important point in that is the word “employee.” To take advantage of an accountable plan, you must be an employee. Therefore, if I was a sole proprietor and Amanda was working for me, I could reimburse her for her out-of-pocket expenses. But for myself, I’m not considered an employee of my sole proprietorship. I can’t reimburse myself. You can learn more about the different types of Accountable Plans here.
When you are reimbursing your employees, as an officer, you’re technically an employee, and that falls under the accountable plan. You can reimburse those individuals, mostly yourself, for those tax advantages. None of this is included in that employee’s gross income.
We do get asked this question a lot: “If I have medical insurance through my employer, can I also deduct that?” The answer is, it depends. You can’t double-dip. If you’re already taking or getting medical insurance premiums paid by your employer pre-tax, then that’s already a deduction that you’ve taken before it’s even hit your tax return. You’re not going to be able to be reimbursed for those expenses and have the corporation deducted. In any case, where you’ve already taken a deduction for an expense, you’re not going to be allowed to also reimburse yourself from the corporation and take that as a deduction.
Typically under the accountable plan, you’re going to be able to reimburse yourself through your S or C corporation for any out-of-pocket expenses on behalf of the corporation. These must be reasonable, ordinary, and necessary business expenses.We’re talking about things such as mileage, your cell phone equipment, any ordinary, reasonable, and necessary expense related to the business.
Unlike an accountable plan, you are required to have your medical reimbursement plan in writing before you begin reimbursing and deducting medical expenses related to the corporation for your employees and their spouse or dependents. This comes up quite a bit as well in terms of: Is it possible to go back and capture any medical expenses that I had in prior years?
Usually, the answer to that is typically no, unfortunately. You had to have that medical reimbursement plan in place, which means you’d, had to have the corporation in place in order for the corporation to resolve, to have a medical reimbursement plan.
A medical reimbursement plan is actually only available to a C corporation. You have your accountable plan and an S or a C, but you can only have the medical piece of the reimbursement plan in the C corporation. Now I say, you can have one in a C, I don’t know if I necessarily want to say that you cannot have one in an S corporation, but an S corporation is a flow-through entity, which means that if the S corporation reimburses you for medical expenses, it’s going to flow through a separately stated item.
This means it’s going to flow through to your schedule A, be deductible at the seven and a half percent for limitation, and then you may as well have just deducted it, on your personal tax return, versus going a long way around, trying to use the S-corporation for medical reimbursement plan.
If you have a W2 employer who’s paying for a portion of your premiums, you can get the portion that you cover that comes directly out of your paycheck covered. Also if you own an S-corp, you’re technically considered self-employed in some way. Therefore, you can take the self-employed health insurance deduction on your schedule one.
I don’t know how long the schedule one’s going to last. I hope not long. If you’re more than a 2% shareholder, you are allowed to take the medical insurance premiums on the S corporation, but you have to include them in W2 income, and they will be in adjustment to income. Your copays, your prescriptions, and so on are all going to run through the S-corp, but you can do the medical reimbursement plan for those types of expenses through the C-corp.
Let’s talk about a wellness plan. The corporation reimburses you for things like gym memberships, supplements, vitamins, and wellness-related expenses.
A lot of people get their corporations and say they’ve heard they can deduct things like gym memberships. I’m going to go out and join one of these super expensive gyms, and my business is just going to pay for it. But it’s a bit of a catch-22 because if your company takes it as a deduction, then it is includable in your income, your W2 income. You don’t get that double benefit of having a completely tax-free gym membership.
If you are the only owner of your C corporation, it doesn’t make much sense tax-wise to do it that way because–even though your company’s paying for the gym membership–you have to claim the value of that as income. So you’re being taxed on it.
There is a way around that. You do have to be diagnosed by a medical doctor who is treating you. But if you get a prescription for a gym membership, if you are clinically obese or have some sort of other diagnosable illness or disease, to which a medical professional has recommended or essentially prescribed you to exercise more then, those now are not under a wellness plan, but they’re more of a medical expense, which makes them fully deductible and reimbursable under a one or five.
What about deducting a massage from a chiropractor? Certainly. A chiropractor is a medical professional, and they’re usually treating you for a specific medical condition or injury. We can look at that as being a deductible expense. I wanted to bring up a wellness plan, so we just didn’t confuse the wellness plan with the medical reimbursement plan.
The wellness plan is good because it allows you to be able to reimburse yourself from your corporation for wellness types of expenses. But that doesn’t mean it is deductible to the corporation. It is a way for the corporation to be able to pay for some of your, what would be considered personal expenses under the wellness plan. Again, personal expenses being wellness expenses, in this case.
The Administrative Office?
Another part of the accountable plan, which is a very potent part, is the administrative office. What’s the difference between an administrative office and a corporation and taking the business use of home deduction on your personal tax return.
The calculation is virtually identical, aside from your personal return. There are only two places you can take it: on your schedule C sole proprietor, and on a possibly unreimbursed partnership expense, and on a partnership you may have. The other thing is, on that particular entity, the C Corp or that partnership, you must have taxable income, where if your schedule C has a loss, then the form 8829 will be disallowed.
Now, if you’re over at your corporation, you’re going to run the calculation very much the same, but you’re going to do the calculation, and it’s based on three different computations, the square footage, the number of your rooms, or your net square footage. Also, part of that deduction, you’re going to look at your home’s percentage for office use. With this, you’ll be able to deduct the interest on your home, the real estate taxes on your home, the insurance on your home, utilities, repairs, and maintenance.
Now, taking the business use of home deduction on your personal tax return, it does put a little bit of a target on your back with the IRS. They’ve told us that they don’t like the businesses of home deduction because what they did is they went and said, well, specifically, as they are really drilling down on how you calculate something and they want to see all the details, they’re not paying. The IRS is not a fan of it, but they give you a crumb. Also, you’re not required to take depreciation, but you are going to be required to recognize depreciation recapture, whether or not you took the depreciation expense, on the business use of home when you sell a property.
The depreciation recaptures, much like rental real estate, will be based on, allowed, or allow a bowl depreciation, for the business’s percentage of the home. If you don’t want that target on your back to increase the higher audit risk of having the businesses at home, you don’t have to. Then we can look at the accountable plan through your S or C corporation and take the administrative office deduction over there.
Circling back in regards to the computation for the deduction. One of the questions that I see a lot is showing me where it says that I can take the net square footage deduction for my administrative office. There’s nothing that says that you can take the net square footage deduction.
The publication says that you can use any reasonable method for calculating your business use of home or your administrative office. Then they provide us with the two commonly used. There is nothing in there that says, those are the two types of ways that you can calculate it. There’s no other method that you can use or any reasonable method.
The reasonable method is the net square footage method. The net square footage method is much like the square footage method, except we’re simply taking out any square footage that’s unusable from our total square footage.
When we’re calculating the business use of home space, we’re simply taking the square footage of our room and the total square footage of the property to get our business use percentage. So we’re going to take out the net square footage, the hallways, stairs, landings, utility rooms, and things like that.
Looking at direct versus indirect expenses for the accountable plan home office, you just really take out the things that have nothing to do with your home office being run. Now, if you have clients coming over to your home or doing networking-type events at your home, you can even deduct a portion of like your landscaping or even your house cleaning.
Basically, indirect expenses are just the expenses for whole-home, and then you’re taking the percentage of that. Direct expenses would be any expenses that are directly related to the room alone. If I replaced the flooring just in that room, that’s a direct expense. I’ll be able to take 100%. If I painted just that room, direct expense, put up shelving in that room, direct expense. If I had a cleaner that was coming over on a regular basis, and their only job was to clean that room, that is a direct expense. It’s just talking about what you’re using for the whole home indirect equals only taking the business use percentage, let’s say 20%, is what you’re using for the business use.
Therefore, 20% of your utilities is what you’d be able to reimburse and deduct on the corporation. Cleaner coming to take care of just that room, 100% deduction, as or reimbursement and deduction under the corporation. To sum up, your accountable plan is going to be your reimbursement plan, through your C or S corporation, that you can reimburse yourself for, through the corporation as an employee, remember, an officer of a corporation is considered an employee, regardless of whether they’ve cut a paycheck to themselves or not.
The accountable plan is a fantastic way of getting money out of your corporation, tax-free, and creating your deduction on your corporate tax return, as well as making sure you’re taking advantage of your medical expense reimbursement plan in your administrative office.
Well, I hope you’ve enjoyed and found today’s Toni Talk informative.
If you’d like to discuss any of these things further, you can be sure to go ahead and give us a call, so we can set up a chat.
Thanks so much.
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