Discussion:S-Corp Owner/Employee Reimbursements

I have a client who is a 100% owner of his S-corp for his computer consulting business. He does not have any employees except for himself. He takes a paycheck for 50% of his income and takes the other 50% in distributions when needed. He is paying his cell phone bill from his personal bank account and having the business give him a cell phone allowance of about $100 a month on his paycheck. He is also getting a mileage allowance of .55ct a mile on his paycheck for business use of his vehicle. And last the business is reimbursing him for the business use of a home office about 200 month on his paycheck. I would assume that the S-corp would take a deduction for the cell phone, the mileage and the home office but how is this handled on his personal return. Will those amounts he receives as an allowance or reimbursement be added to his income on his W-2? This is all new to me so I hope I explained it correctly. I am going to be doing more and more S-corp's so I want to make sure I understand how to apply the tax laws correctly.

Thanks! GTSEA09

Try and scare him into doing the right thing:

http://www.taxalmanac.org/index.php/Discussion:I_love_it!_US_Tax_Court_on_lack_of_documentation

If he does not clean up his act, you'll have to fire this client. He'll soak up more time than you ever imagined.

1) A non accountable plan. No receipts are required. It's a set amount each month. Example the cell phone allowance is $100/mo according to the OP. This gets added to the gross wages, subject to all taxes. When the 1040 is done, do a 2106 list the expenses less the reimbursements.

2) An accountable plan: Keep a log of the expenses and the receipts. Submit at regular intervals to the corp. The corp will reimburse the exact amt of the bills. Then the corp has the various expenses on the books. It does not go through the p/r. No extra taxes w/h. It does not appear on the 1040 unless a 2106 is needed for some unreimbursed item.

This is not only for s corps. It is for any business.

With Method 2, there is no 2% AGI. More work up front, but preferable - every thing gets documented and paid as you go along. No-dog-ate-my-receipts at the end of the year.

He is not accounting for his cellphone usage; the $100 should be part of his wages. I realize it is difficult in these days of flat fees for phones to make an accounting, but this could be a problem. I note that my cellphone service stopped giving itemized bills two years ago.

The $200 [or is it about $200, a different amount each month?] might also be wages if not accounted for.

Read Publication 463 carefully.

The results of using an "accountable plan" for reimbursement of employee business expenses are way far superior to what "less sophisticated" approaches get you.

The taxpayer can completely avoid the 2% haircut of his miscellaneous itemized deductions that can cost him a portion - or maybe all - of the income tax benefit of his business expenses. The taxpayer and his employer can completely avoid payroll taxes on the amount of his business expenses.

In some situations, the result can approach a 50% tax savings.  How's that? you say.  30% federal income tax, 6% state income tax, and 15% FICA/Medicare tax.  50%, plus or minus.

It behooves your client to be doing this *today* and not at the end of the year.

1. When your client has properly adopted an "accountable plan," his business expenses don't even show up on his personal income tax return!!  Read the laughably disastrous court case cited above and consider this: How did the IRS select that taxpayer for an audit in the first place? 

2. Read carefully the necessary and sufficient conditions that must obtain to support a successful home office deduction.  And share that information with your client. Put it in writing.  Your client must know what he must do so that he can't come back to you later and say "What the hell happened?"

With a non-accountable plan, you are reimbursed a set amount from the employer, without submitting any receipts to the employer. Therefore the reimbursement is added to your p/r, subject to all taxes. When you do your 1040, a 2106 is added to the tax return. As said above it is subject to the 2% agi. You should be keeping the receipts for your own purposes so the 2106 can be completed accurately.

With an accountable plan, the receipts and log are submitted to the employer in order to get reimbursed. You will be reimbursed the exact amount of the total expense. No 2106 is required on the 1040.

I had a client who would spend 1 or 2 days a week visiting customers for the employer. The employer reimbursed the mileage usually 15 cents/mile less than what was allowed by the IRS. A 2106 had to be completed so the balance of the expense could be deducted on the 1040.