Contents
Overview
Mixed purchases benefit both your business and personal life. Rent for your home and and mileage you put on your car are common examples. An Accountable Plan allows S Corp owners to pay for mixed purchases with personal funds and reimburse themselves for the business portion. This makes it appear as an expense on your Profit & Loss report. The general steps are:
Pay for mixed purchases with personal money
Calculate the business portion using the accountable plan found on the reimbursement tab on your Member Dashboard
Transfer money from your business checking to your personal checking.
Upload your previous month's bank statement through the document section in your Member Dashboard
Your transactions will be categorized as âEmployee Reimbursementâ by your Collective Accounting Advisor
Common Examples
For Renters
Divide the square footage of your home office by the total square footage of your home (ex. 150 sq ft/2,000 sq ft). Multiply that percentage by home renting expenses: rent, utilities, renter's insurance, etc.
For Homeowners
Divide the square footage of your home office by the total square footage of your home (ex. 150 sq ft/2,000 sq ft). Multiply that percentage by home owner expenses: mortgage interest only, property tax, HOA dues, utilities, homeowner's insurance, etc. Any principal paid on your mortgage is not an expense, it's paying off a loan, so it can't be included in this process.
Note: For both renters and homeowners, to be eligible for the home office reimbursement, your office space generally must be exclusively used for business on a regular basis and it also must be your principal place of business.
Auto Expenses
Don't track gas, maintenance, repair, lease, and loan expenses for your car. Instead, track your business miles driven and multiply by the annual IRS mileage reimbursement rate. Options to track miles are:
Odometer readings on a paper/digital log
Third-party software: Mile IQ, Timeero, TripLog Beacon, Everlance, etc.
Action
These detailed steps and the spreadsheet will walk you through the entire process.
Complete the reimbursement every month.
Transfer funds from your business checking account to your personal checking account with a check or an online transfer. Make a note in the memo of the check or bank transfer (if bank allows) for the month the transfer is for.
Save all documentation for 3 years.
The IRS wants this process repeated consistently once a month.
Please note: Reimbursements should not be ran in Gusto
How Do I Make Sure My Expenses Are Valid and Deductible?
To keep everything above board with the IRS, you need to follow these key steps:
1. Timely Substantiation
Keep all your receipts and records for your expenses.
Submit an accountable plan worksheet through app.collective.com.
Do both of these within 60 days of when you spent the money.
2. Timely Reimbursement
Your company needs to pay you back the exact amount on your accountable plan worksheet.
This payback needs to happen within 60 days of the month on the worksheet.
For example, if you're expensing stuff from March, you need to be paid back by the end of May for it to count.
3. Proper Record Keeping
Keep detailed records for each category:
Home Office: Records of your home expenses and how you figured out the business use percentage.
Mileage: A log with the date, where you went, why, and how many miles you drove for each business trip.
Phone/Internet: Bills showing what you paid and how you calculated the business use percentage.
Hang onto these records for at least 3 years after you file your tax return or when it was due, whichever is later.
Why Proper Documentation Matters
Keeping good records isn't just about being organized â it's about protecting yourself. If the IRS comes knocking, you want to be ready. Inadequate documentation could mean disallowed deductions, which could lead to a bigger tax bill plus penalties and interest. Not fun!
Tips
The accountable plan is a great tool to implement and we want to ensure that you are taking all the optimal deduction while staying in compliance with the IRS. We have established some safe guards to ensure that your accountable plan is being used properly:
Home office percentage: It can be tempting to state that your home office utilizes a large portion of your home to increase your deduction. We want to remind you that the square footage of your home office must be EXCLUSIVELY for business use only. In most cases, we do not recommend that the square footage of your home office exceeds 25% of your entire home. If you have a unique case and in fact have a home office that is in excess of 25% of your entire home then we will require some additional documentation before we can allow you to claim the deduction.
Phone and Internet: It may feel like all you do is work, work, work and you need your phone and internet to do just that. The rules on documenting phone and internet usage for an accountable plan are, like most things with the IRS, fuzzy, and heavy-handed. It would also be highly difficult to justify a mixed use expense where youâre using more than 70% of your phone and internet for business to the IRS. If you were awake from 7am to 10pm every day, you would need to work 11 hours a day solely on business things using your internet and phone in order to exceed 70% usage. (Quick GSheets for playing around fun). So our worksheet does not allow you to exceed, that's right you guessed it, 70%.
Have any other questions?
Reach out to the Collective team at [email protected] đ
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining accounting or other financial advice from an appropriate financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.