Accountable plans for S corp owners

Mia does IT consulting from a back bedroom in Denver. As a sole proprietor she just wrote her home office, her phone and her driving onto Schedule C. Then she made the business an S corp, and that stopped working, because now she's an employee of her own company, and employees don't get to deduct those costs anymore. The fix is to have the company pay her back under an accountable plan.

Why the S corp owner loses the deduction

Back before 2018 an employee could itemize unreimbursed work costs. Then the 2017 tax law switched that off, and section 67(h) now bars miscellaneous itemized deductions for every tax year starting after December 31, 2017 (the 2025 law took out the 2026 end date, so it isn't coming back). Publication 529 puts it bluntly. Unless you're in one of a handful of listed jobs, Armed Forces reservists for example, you can't claim them.

So if Mia pays $6,815 a year of business costs out of her own pocket and the S corp doesn't pay her back, nobody deducts it. That's money she was writing off as a sole proprietor.

What makes a plan "accountable"

The rules are in Treas. Reg. 1.62-2. An arrangement is an accountable plan if it meets three tests:

1. Business connection. Mia spent the money doing work for the company, not for herself.
2. Substantiation. She hands over receipts, a mileage log, whatever shows the amount, the date and the reason.
3. Return of excess. Any advance beyond the proven expenses goes back within a reasonable period.

Get all three right and the payments are left out of the employee's income, stay off the W-2, and carry no income tax withholding, Social Security, Medicare or FUTA. Miss one and the payments are wages, with all of those taxes.

"Reasonable period" has a safe harbor in the reg. An advance paid within 30 days of the expense, expenses proved within 60 days, and any excess returned within 120 days all count as on time. A company can also send statements at least once a quarter asking for proof or the money back, and then the employee has 120 days.

Put it in writing anyway. A one-page board resolution saying the company pays back documented business costs on these deadlines makes all three tests easy to show later.

Home office

This one's the most delicate. Section 280A allows a home office for an employee only if the exclusive use is "for the convenience of his employer." And renting the room to your own S corp doesn't work, since 280A(c)(6) shuts that off.

The usual route is for the company to pay back the business share of actual home costs, as long as the office meets that convenience test. That is a judgment call, so ask your preparer before you set it up. Publication 587 figures that share by area (its Frankie example uses a room that's 8% of the home). Mia's office is 200 of her 2,000 square feet, so 10%. On $24,000 a year of rent and utilities that's $2,400. The room still has to be used only for the business, and regularly.

Phone

Publication 15-B says an employer-provided cell phone is a tax-free fringe benefit when it's mainly for noncompensatory business reasons, like a client who needs to reach you outside office hours. If Mia keeps her own phone and the company pays back the business share, that's an accountable plan reimbursement. With a $100 monthly bill and 60% business use, she sends in the bills and gets $720 for the year.

Mileage

Odd year for mileage. The IRS bumped the business rate in the middle of 2026: 72.5 cents a mile through June, 76 cents from July 1 (see the standard mileage rates page). Publication 15 says an employee paid by the mile is treated as having accounted for the amount if the rate doesn't go above the federal one. She still needs a log with dates, places and the business reason for each trip, as Publication 463 explains.

Mia logged 3,000 client miles before July and 2,000 after, mostly to a dental office in Aurora whose server keeps falling over, so $2,175 plus $1,520.

Adding it up

Mia pays no tax on any of that $6,815, and the S corp gets to treat it as an ordinary business expense under section 162. Run the same amount through payroll as a raise and it's wages: income tax, plus roughly $1,043 of FICA at 15.3%.

Sole proprietors don't need any of this

Back when Mia was a sole proprietor, none of this paperwork existed. There was no employer to pay her back. She put the office on Form 8829 (or used the simplified method, $5 a square foot on up to 300 square feet, so $1,500 at most) and the miles at the IRS rate, right on Schedule C.

It's a minor thing, but count it before switching. For the bigger numbers there's the structure switch calculator and the S corp savings calculator, and the pay side is in reasonable salary. One habit worth having either way: book reimbursements on their own line, apart from salary and distributions, so the records match the plan.