Here’s a short note on your payments of corporate expenses.
Your Corporation is a Separate Legal Entity
As a business owner operating through a corporation, you need to remember that the corporation is a distinct legal entity separate from you.
Avoiding Costly Mistakes
If you incur expenses related to business travel, meals, lodging, or mileage without seeking reimbursement from your corporation, the corporation does not receive a tax deduction for these costs. Furthermore, you cannot personally deduct these expenses on your individual tax return, as the Tax Cuts and Jobs Act (TCJA) eliminated unreimbursed employee business expenses as an itemized deduction from 2018 through at least 2025.
The Right Way: Accountable Plan Reimbursements
To ensure tax compliance and financial efficiency, you should submit an expense report to your corporation and receive reimbursement under what is known as an “accountable plan”. When structured correctly, an accountable plan provides the following benefits:
- You receive tax-free reimbursements for legitimate business expenses.
- Your corporation gets the full tax deduction for the expenses reimbursed.
- Proper documentation protects you in the event of an IRS audit
Steps to Implement an Accountable Plan
To maintain compliance and ensure proper reimbursement, follow these best practices:
Maintain detailed records. Keep receipts, mileage logs, and business purpose explanations for all expenses.
Submit expense reports. Provide written reports to your corporation, outlining the details of each expense.
Ensure timely reimbursement. Have your corporation reimburse you within a reasonable time frame.
Avoid overpayments. Return any excess amount if your corporation advances funds for expenses.
Take Action Now. To ensure that you maximize tax benefits and stay compliant, I strongly recommend implementing a formal reimbursement process.
If you want our help establishing an accountable plan or structuring your reimbursements correctly, please get in touch with us at hello@agfintax.com.
