Accountable plans: reimbursing expenses tax-free

Employees and owner-employees often pay for business costs themselves: mileage, a home office, a phone or travel. An accountable plan is how the business pays them back without creating taxable income. This guide explains the rules and how to set one up.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. Checked against official sources on . 2 minute read.

Short answer

An accountable plan lets a business reimburse employees, including S corporation owners, for business expenses without the payments counting as wages. It must meet three rules: the expenses have a business connection, they are substantiated within a reasonable time, and any excess advance is returned. Reimbursements under a plan that fails these rules are taxable wages.

At a glance

Rule 1
Business connection
Rule 2
Substantiation within a reasonable time
Rule 3
Return excess advances
Safe harbor
Substantiate within 60 days; return excess within 120
Allowed shortcuts
Standard mileage and per diem rates
If the rules fail
Reimbursements are taxable wages
Accountable plans: reimbursing expenses tax-freeSteps: 1. Business connection; 2. Substantiation; 3. Return of excess.THE PROCESS AT A GLANCEAccountable plans: reimbursing expenses tax-free1Business connectionThe expense was paid or incurred whileperforming services for the employer2SubstantiationThe employee gives the employer theamount, date, place and businesspurpose, with receipts where required,within a reasonable time3Return of excessAny advance or allowance beyond thesubstantiated expenses is returnedwithin a reasonable timeChecked against official sourcesTax BakersAccountable plans: reimbursing expenses tax-freeSteps: 1. Business connection; 2. Substantiation; 3. Return of excess.THE PROCESS AT A GLANCEAccountable plans: reimbursingexpenses tax-free1Business connectionThe expense was paid or incurred whileperforming services for the employer2SubstantiationThe employee gives the employer the amount,date, place and business purpose, withreceipts where required3Return of excessAny advance or allowance beyond thesubstantiated expenses is returned within areasonable timeChecked against official sourcesTax Bakers
The process at a glance: 1. Business connection; 2. Substantiation; 3. Return of excess.

What are the three rules?

  1. Business connection

    The expense was paid or incurred while performing services for the employer.

  2. Substantiation

    The employee gives the employer the amount, date, place and business purpose, with receipts where required, within a reasonable time.

  3. Return of excess

    Any advance or allowance beyond the substantiated expenses is returned within a reasonable time.

Under a safe harbor, substantiating within 60 days of paying the expense and returning excess amounts within 120 days counts as reasonable. See IRS receipt requirements.

How does it compare with a non-accountable plan?

Accountable planNon-accountable plan or allowance
To the employeeTax-freeTaxable wages
Payroll taxesNoneWithholding, Social Security and Medicare
On the W-2Not reportedIncluded in wages
To the employerDeductible as the underlying expenseDeductible as wages

Can standard rates be used?

Yes. Mileage can be reimbursed at the IRS standard rate, 72.5 cents a mile for January to June 2026 and 76 cents from July, with a log of business trips. Travel meals and lodging can be reimbursed at federal per diem rates, with records of time, place and purpose. Reimbursing above these rates without substantiation makes the excess taxable.

Why does it matter for S corporation owners?

Owner-employees of S corporations cannot deduct unreimbursed job expenses on their personal returns. An accountable plan lets the corporation reimburse their business costs, such as the business share of a home office, a phone or mileage, tax-free to the owner and deductible to the corporation. See S corp bookkeeping.

How is a home office reimbursed?

The owner-employee calculates the business share of rent or mortgage interest, utilities, insurance and similar costs by floor area, submits it with records, and the company reimburses that amount. The office must be used regularly and exclusively for business. See home office deduction.

How do you set one up?

  1. Adopt a short written plan

    Covering the three rules and the 60 and 120 day timelines.

  2. Use an expense report

    Monthly or quarterly, with receipts and purposes.

  3. Reimburse from the business account

    Recorded as the underlying expenses, not wages.

  4. Keep the records

    With the books for the records period.

Reimbursing yourself or your staff?

We draft a simple accountable plan, set up reimbursements in your books and payroll, and keep the records that support them.

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Questions people ask

What is an accountable plan?

An arrangement that lets a business reimburse employee business expenses tax-free if the expenses are substantiated and any excess is returned.

What happens if a plan is not accountable?

Reimbursements and allowances become taxable wages, subject to withholding and payroll taxes.

Can an S corporation reimburse the owner's home office?

Yes, under an accountable plan, for the business share of qualifying home costs.

How long do employees have to submit expenses?

Under the safe harbor, within 60 days of the expense, with excess advances returned within 120 days.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IRS Publication 463: Travel, Gift, and Car Expenses
  2. IRS Publication 15 (Circular E): Employer's Tax Guide, accountable plans
  3. Treasury Regulations section 1.62-2: reimbursements and other expense allowance arrangements
  4. IRS: Standard mileage rates

Rules and fees change. If you are reading this long after October 1, 2026, confirm the figures with the source before you rely on them.

BookkeepingBookkeeping for S corporations: payroll, distributions and shareholder loansBusiness tax by entity typeHome office deduction: who qualifies and how to calculate itPayroll and contractorsS corp owner payroll: how to put yourself on payroll

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This guide is general information. It is not tax or legal advice for your situation.