By Tom Andrews, CPA
Many contractors in the yachting industry are conducting business through an S Corporation, while there are many reasons for using an S Corporation the purpose of this column is to discuss the method an employee of an S Corporation will be reimbursed for out of pocket business related expenses.
While most business related expenses are paid for by the corporation itself through the company bank account or credit card, sometimes the employee/shareholder of the corporation will use their personal credit card or checking account to pay for business related expenses. In these instances it is important that the employee/shareholder follow certain procedures to reimburse themselves for these out of pocket expenses, not following these procedures may result in unintended tax consequences.
Under an “accountable plan” a reimbursement arrangement is formed by the company that requires the employee to substantiate their business-related expenses to the company within a reasonable period of time (no more than 60 days from the date of the expense). Typically the employee will accumulate the unreimbursed business related expense receipts, attach those receipts to a reimbursement form and the company will write a reimbursement check or transfer funds to the employee. Under this method the reimbursement will be a deductible expense on the company books and will not be included as income to the employee. This method should also be used when reimbursing yourself for the business use of your personal automobile. If for example you are using your personal vehicle for business you will track your mileage using the IRS standard mileage rate, you will submit your mileage to the company and the S Corporation will reimburse for those miles incurred.
There is no IRS form to adopt an “accountable plan” nor does the law require it be in writing. We still recommend that the company memorialize the fact that an “accountable plan” is being implemented either through an employee handbook or the corporate minutes. Sometimes taxpayers become lazy when they are the only shareholder/employee of their own company. It can become easy to start comingling the business expenses and your personal expenses, this sloppiness can cause grave unintended consequences. The IRS draws a clear distinction between the shareholder/ owner of a company and the corporation itself, once you blur that distinction an IRS examiner may seek to strip away the benefits of that S Corporation that you sought out in the first place.
The purpose of this column is not to discuss the merits of opening an S Corporation but to discuss one of the overlooked formalities of operating an S Corporation. If you have detailed questions regarding this topic I recommend you consult with you accountant or attorney.