facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
Retired Military Finances 401: Using an Accountable Plan in an S Corporation to Effectively Deduct Employee Expenses Thumbnail

Retired Military Finances 401: Using an Accountable Plan in an S Corporation to Effectively Deduct Employee Expenses

Taxes

One change to the tax law that I’m not particularly fond of, is the elimination of the Miscellaneous Itemized Deductions Subject to the 2% Floor. One of the deductions under this umbrella was unreimbursed employee expenses. This caused problems for employee-owners of S Corporations (it is worth noting that an LLC can be treated and taxed as an S Corporation, so this could apply to LLCs as well). An owner that has business expenses while acting as an employee can no longer deduct them. That’s a problem.


What Can Retired Military Owners of S Corporations Do?

Fortunately, there is a solution and it is called an Accountable Plan. Basically, under an accountable plan the employee-owner will ask the company to reimburse him or her for the expenses accrued on behalf of the company while acting as an employee. This could include such things as home office expenses, auto expenses and business meals. In an accountable plan the expenses are deductible to the employer and not income for the employee.


It isn’t that hard to set up an accountable plan. In fact, it doesn’t even have to be written (but it should be). Beyond that you really only need to meet three criteria.


  1. The expenses have to be business related. That shouldn’t be a big surprise
  2. The reimbursement has to be completed within a reasonable time
  3. If an advance is paid, then any excess must be paid back in a reasonable time


Here is how it would work. You are the owner of an S Corporation and you are also an employee of the company. You have to drive from your office to meet with a client to discuss an upcoming order from your company. You are acting as an employee so the mileage expense is not deductible for you. Fortunately, you have an accountable plan through your S Corporation. The expense is definitely business related. At the end of the week, you compile your reimbursable expenses and file for reimbursement from the accountable plan. You are reimbursed for the expenses in your next pay check.  The expense is deductible for your company and not income for you.


There Is a Little More to It

There are a few other things, like who is covered by the plan and recordkeeping requirements, but there aren’t that many other requirements. If you’re a retired military officer or NCO business owner and your firm is taxed as an S Corp, give us a call to chat about how this could work for you.

If you found this article useful, you might like the following blog posts:

How Retired Military Officers Can Set Up Their Small Business So They Can Take a Vacation


5 Steps to Set Up a Business After Retiring from the Military


Retirement Plan Options for Self-Employed Retired Military Officers




Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.