S Corp Expenses Never Reimbursed: Accountable Plan Catch-Up

Can my S corp still reimburse me for expenses I paid myself?

An S corporation can repay a shareholder who works for it. Treasury Regulation 1.62-2 gives safe-harbor times, not a deadline; outside them the question is whether the time was reasonable. The tax result turns on three accountable plan rules: a repayment of your own job costs that meets them is tax-free, and one that does not is wages. A bill that was the company's own is a different item, handled as debt or capital rather than a reimbursement (see the sorting table below).

The rules cover an employee's costs, and corporate officers who work in the business are employees of the corporation (Publication 15). A shareholder who is not an employee has no job costs to repay; what you paid for the company is a company bill.

A case is not simple when:

• the company never had a reimbursement policy;
• the expenses are older than the safe-harbor times below, or span a year or more;
• the year they belong to is closed, or its return is filed;
• the amounts are large;
• the pile mixes company bills, your own job costs and personal spending.

If more than one of these applies, settle how each item is treated before you book anything; see bookkeeping help.

Gather first: receipts and invoices, the card or bank statements that show you paid, a mileage log, the size of any home office and of the whole home, and the company's payroll reports and W-2s for the year.

What makes an S corp reimbursement tax-free under an accountable plan?

An S corporation's repayment of a shareholder-employee's own job costs is tax-free when the arrangement meets all three rules below. Amounts paid under it are not wages, stay off the W-2 and carry no income or payroll tax (Regulation 1.62-2; Publication 15).

A safe harbor is a time the regulation treats as reasonable without further argument. Outside it, a reasonable period depends on the facts and circumstances (Publication 463). A second safe harbor covers proof or a return within 120 days after each periodic statement when the company sends statements at least quarterly asking for unsubstantiated expenses (Regulation 1.62-2(g)(2)(ii)); the regulation does not say whether it reaches expenses paid before the plan existed. The arrangement does not have to be a written plan (Publication 5137), but a short written policy shows later what the rules were.

Plan wording and the home-office, phone and car rules are in S corporation reimbursements for home, phone and car.

What if the reimbursement is late or has no receipts?

A repayment that misses an accountable plan rule is treated as wages. If the company's arrangement does not require proof of each expense and the return of any excess, every dollar paid under it is wages. If it does require them, the part not proved within a reasonable period, or not returned, is wages (Regulation 1.62-2, paragraphs (c)(3) and (h)(2)). A missing receipt alone does not decide it: Publication 463 excuses one for an expense under $75 (lodging excepted) and for transportation when none is readily available, but a record is still required.

Wages mean the company withholds income tax, and the company and the employee each pay Social Security at 6.2% (up to the annual wage base) and Medicare at 1.45%. Federal unemployment tax applies too, and the amount goes on the W-2 (Publication 15; Publication 463). Where the arrangement itself fails a rule, wages are taxed when paid (Regulation 1.62-2(h)(2)(ii)), so costs from last year repaid this year as wages go on this year's payroll reports. Under a plan that otherwise qualifies, the unproved part is taxed by the first payroll period after the reasonable period ends (paragraph (h)(2)(i)(A)).

If the company treats a repayment as wages but never withholds and pays over the tax, an owner who has the duty and power to pay it and willfully does not can be personally liable for the unpaid withheld income tax and employee Social Security and Medicare (IRS; section 6672). The usual time to assess is 3 years from the following April 15, or the filing date if later, with no limit while the payroll return is unfiled (IRM 5.7.3); see trust fund recovery penalty.

Records collected afterward do not turn an arrangement that never required proof into an accountable plan (Publication 463). If the arrangement does require proof, an expense substantiated after the safe harbor is judged on whether the time was reasonable, and the company may treat it as late (Regulation 1.62-2(h)). A repayment that replaces pay the owner would otherwise have received as wages also stays wages (Publication 15); for salary, see S corporation owner salary.

Can I deduct the expenses myself if the company never repaid me?

Generally no. An employee cannot deduct unreimbursed job costs on a personal return: that deduction, called miscellaneous itemized deductions, is suspended, and Public Law 119-21, section 70110 removed the end date of that suspension. Publication 463 limits Form 2106 to Armed Forces reservists, qualified performing artists, fee-basis state or local government officials and employees with impairment-related work expenses.

The company's deduction for an employee's job cost comes from repaying it. A cost that was yours as an employee and that the company never repays is generally deducted by no one, which is why a documented repayment matters.

Can I set up an accountable plan now for expenses I already paid?

A plan adopted now is meant for expenses from the day it takes effect. The regulation does not address a plan adopted after the expenses were paid, and its safe harbors count from the day each expense was paid or incurred (Regulation 1.62-2(g)). Expenses handed in later than 60 days after the expense is paid or incurred therefore fall outside the fixed-date safe harbors. Whether a late repayment still falls within a reasonable period is a facts-and-circumstances question that those safe harbors do not settle, so repaying older job costs under a new plan carries a risk of wage treatment.

Never backdate a plan or its approval; date it the day the company adopts it. In order:

1. Adopt a plan now for expenses from that day on. It should require records of each expense (receipts where required) within 60 days after the expense is paid or incurred, return of any excess within 120 days after the expense is paid or incurred, and cover only business costs.
2. Sort every older item (next section).
3. Older job costs have three possible results, each with a different tax cost: repaid under the plan (the company may treat it as wages), paid as wages (income and payroll tax), or left unpaid (generally deducted by no one). Which fits is a preparer's decision.
4. Book company bills you paid as money the company owes you, or as capital you put in (see the loan section below).

Which expenses are company bills, and which are my own job costs?

Sorting each item decides how it is treated. A company bill is owed by the company; your own job cost is repaid tax-free only under the plan; personal spending is not a reimbursement.

An item that could be either of the first two, such as a subscription in your own name that the company uses, is a preparer's call. Only a business cost that would be deductible qualifies for the tax-free route: repaying a nondeductible or personal item under the plan makes that part wages (Publication 463). Business meals are the exception: when only the limit on deducting meals makes part of a reimbursed meal nondeductible, that part is still not wages (Regulation 1.62-2(h)(1)); the limit falls on the company's deduction, not on you.

How do I reimburse myself from my S corp and record it?

An S corporation records a reimbursement as an expense and an amount owed to the owner, then clears that amount when it pays.

• Pay an accountable reimbursement separately from wages, by check or transfer, and attach the receipts to each entry. If it shares a payment with wages, the reimbursement amount must be identified separately (Regulation 1.62-2(d)).
• Enter each expense once, from the receipt, not again from the personal card statement.
• Do not run repayments through owner distributions: payments to a shareholder-employee labeled distributions have been held to be wages (IRS). See recording S corporation distributions.
• If the repayment is wages, run it through payroll as additional wages so withholding and the W-2 pick it up.
• Date a reimbursement of your own job cost in the period the company approves or pays it. A company bill you paid stays in the period its accounting method puts it in; repaying you only clears the amount owed. A bookkeeping entry does not reopen a closed or filed year; whether an earlier year changes is a preparer's question (Correcting a filed business return).

A company on the cash method usually deducts an expense in the year it pays it (Publication 583), so a job-cost reimbursement made after year-end usually falls in the new year. An accrual-method company deducts a bill when the liability is incurred, paid or not (Publication 583; Regulation 1.461-1(a)(2)). Which year a company bill you paid from personal funds belongs in is a preparer's call. For personal-card costs in any business, see business expenses on a personal credit card.

Can I treat what the company owes me as a loan instead?

Sometimes, for the company's own bills. What the company owes you is already a liability on its books; treating it as a loan means it must be real debt that runs directly to you, and a label alone does not settle that (Regulation 1.1366-2(a)(2)). Only real debt adds to your debt basis, the running total of company loans that lets you deduct company losses beyond your stock basis (Instructions for Form 7203). Once losses have reduced that basis, part or all of a repayment can be taxable to you (IRS). A note signed now for payments made earlier may be weak proof that they were loans. The IRS page on S corporation shareholders lists cases where payments labeled loans, loan repayments or distributions were held to be wages or capital.

• A cost that was yours as an employee was never a company bill, so booking it as a loan later is a judgment call for the preparer.

Terms, interest, basis and repayment are in shareholder loans to an S corporation.

What records prove each expense?

The company needs a record of each expense, not a lump sum. Broad categories such as "travel" or "miscellaneous" do not count (Regulation 1.62-2(e)).

For travel, gift and car costs, a receipt is generally needed for any expense of $75 or more and for all lodging (Publication 463). A shareholder who owns, directly or indirectly, more than 10% in value of the company's stock is "related" to the company (Publication 463), so keep your own copy of every record you hand in; you may have to prove the expenses to the IRS even after accounting to the company. If receipts are gone, see lost receipts for business expenses.

Example

These examples are illustrative; amounts are in US dollars.

A year paid on personal cards, no plan

The owner of a one-shareholder S corporation, who also works for it as an employee, paid US$6,000 on personal cards over the year: US$2,400 of software billed to the company and US$3,600 of client travel. The software is a company bill, booked as owed to the owner. The travel is the owner's own job cost, and the company has no reimbursement policy, so repaying it now risks wages and payroll tax: treated as wages, the US$3,600 would add up to about US$275 of Social Security and Medicare tax for the company and the same for the owner (7.65% each, if the owner's wages are under the Social Security wage base), plus income tax withholding. The owner adopts a written plan dated that day and, from then on, hands in records and receipts within 60 days of each expense; those later repayments can be tax-free. The travel predates the plan, and the regulation does not say a new plan reaches it, so repaying it is a preparer's call.

Last year's costs, return already filed

An owner drove 8,000 business miles and paid US$1,800 for phone and internet last year, with no plan, and last year's return is filed. A plan adopted now is meant for new expenses. If the company repays last year's costs this year, a cash-method company usually deducts the repayment this year, and whether it is wages is a preparer's call. If it never repays them, generally no one deducts them.

Company bills left as a loan

An owner paid US$20,000 of the company's own vendor invoices from personal funds. The owner and the company sign a note for US$20,000 with repayment terms, dated the day it is signed, and the company books a shareholder loan. Because the payments came first, whether it is real debt depends on the facts, and a preparer decides how to book it. If it is real debt, the balance can add to the owner's debt basis, and a later repayment is a loan repayment, not a reimbursement or wages, though it can still be taxable if losses reduced that basis. Terms, basis and repayment are in shareholder loans to an S corporation.

Different for you?

• A full year is unreimbursed, the amounts are large, you cannot tell wages from a loan from a reimbursement, or the books are behind overall: each item needs its own treatment before entries are booked. Bring the receipts, statements, mileage log and payroll reports to bookkeeping help; for older books, see catching up S corporation books.
• A return is filed or due: whether a filed year changes is covered in correcting a filed business return. Reimbursements, loans and wages that belong in the books should be settled before the 1120-S is prepared; see bookkeeping help.
• The company already repaid you without payroll: see fixing a payroll mistake.
• You paid before the company or the S election existed, or paid your own health insurance premiums: these follow their own rules; see startup costs before launch and health insurance for S corporation owners.
• You want the plan itself for home office, phone and car, or the company paid your personal bills or cards: see S corporation reimbursements for home, phone and car, S corporation paying personal expenses and personal charges on company cards.
• You lent money to the company or want a note: see shareholder loans to an S corporation.
• You are an officer who does no more than minor work for the company: the IRS does not treat such an officer as an employee if no pay is due (IRS), and the accountable plan rules cover employees' expenses. What you paid for the company may then be a loan or capital: see shareholder loans to an S corporation.