What is an accountable plan for an S-Corp?

An accountable plan under IRC §62(c) is a written reimbursement policy that lets your S-Corp pay you back tax-free for legitimate business expenses like mileage, home office, travel, and phone. Without one, S-Corp officer-shareholders cannot deduct these expenses on their personal return.

What expenses can an accountable plan cover for a contractor?

Common expenses include: business mileage to job sites (2025 rate: 70 cents/mile), home office for estimates and admin, cell phone and internet, travel and lodging for trade shows, tools and safety equipment, and health insurance premiums through an HRA.

What is the Augusta Rule for contractors?

IRC §280A(g) lets you rent your personal home to your business for up to 14 days per year tax-free. The business pays fair market rent and deducts it. You receive rental income without reporting it. Use for quarterly board meetings, planning sessions, or crew training.

The Accountable Plan for Contractors: Home Office, Mileage, Travel & Medical Done Right

When you elected S-Corp status, you got a great deal on self-employment tax. But you also lost something: the ability to deduct unreimbursed employee business expenses on your personal return. That mileage driving to job sites, the home office where you do estimates, the phone you use for client calls — all non-deductible for an S-Corp officer on a W-2.

An accountable plan under IRC §62(c) fixes this. It moves those expenses to the entity level, where they become tax-free reimbursements to you and full deductions for the business. No payroll tax. No income tax. Just money back in your pocket for costs you're already incurring.

Why S-Corp Owners Need This

Before 2018, employees could deduct unreimbursed business expenses as a miscellaneous itemized deduction. The Tax Cuts and Jobs Act eliminated that entirely through 2025. If you're an S-Corp officer-shareholder (which most contractors are after electing S-Corp status), you're treated as a W-2 employee of your own company. Without an accountable plan, your business expenses evaporate.

For a typical trade contractor, the lost deductions look like this:

Mileage: 25,000 business miles × $0.70/mile = $17,500
Home office: 300 sq ft × $5/ft simplified method = $1,500
Phone/internet: 75% business use × $200/month = $1,800/year
Travel/trade shows: $3,000–$5,000
Tools/boots/safety gear: $1,000–$2,000

That's roughly $25,000–$28,000 per year in lost deductions. At a combined 40% rate, you're giving up $10,000–$11,000 in real cash. Every year.

The Three IRS Requirements

1. Business Connection. Every expense must have a clear business purpose. Driving to a job site — yes. Driving to the grocery store — no.

2. Adequate Substantiation. Document expenses and submit them within 60 days. For mileage, keep a contemporaneous log — date, destination, business purpose, miles. For other expenses, receipts with amount, date, and business purpose.

3. Return of Excess. Any advance over actual expenses must be returned within 120 days. In practice, most contractors reimburse after the fact, which eliminates this issue.

Fail any one prong and the IRS reclassifies the entire reimbursement as taxable compensation — subject to income tax and payroll tax. Document everything.

Setting It Up: 30 Minutes, Worth $10,000/Year

You need a written plan — a one-page board resolution specifying eligible expenses, substantiation requirements (60-day rule), return-of-excess provision (120-day rule), and reimbursement rates. Adopt it in a board meeting, document with minutes, then start tracking and submitting expenses monthly.

The Big-Ticket Items for Contractors

Mileage

At $0.70/mile for 2025, a contractor driving 30,000 business miles gets a $21,000 tax-free reimbursement. Keep a mileage log — date, starting point, destination, purpose. Use an app like Everlance or MileIQ.

Home Office

Simplified method: $5/sq ft up to 300 sq ft ($1,500 max). Actual method — real percentage of mortgage/rent, utilities, insurance — often yields $5,000–$8,000/year for contractors with a legitimate workspace.

The Augusta Rule

Section 280A(g): rent your personal residence to the business for up to 14 days/year without reporting the rental income. The business deducts the rent. Hold quarterly planning meetings at home. Pay fair market rent — $500–$1,000/day in Southern California. Four quarterly meetings plus a few sessions: $5,000–$10,000 in tax-free income.

Documentation: Written rental agreement, meeting agenda, attendee list, minutes, fair market rate comparison from VRBO or hotel rates.

The Math in Practice

$5M plumbing contractor, S-Corp, $400K owner income:

Mileage: 28,000 miles × $0.70 = $19,600
Home office (actual method): $6,200
Phone/internet: $1,800
Travel/education: $4,500
Tools/equipment: $1,500
Augusta Rule: 6 days × $800 = $4,800

Total reimbursement: $38,400/year tax-free. At 45% combined rate: $17,280 in annual tax savings.

No fancy structure. No aggressive position. Just documenting what you already spend and running it through the right channel. This stacks with every other strategy in the contractor tax playbook.