Shareholder Distributions as Reimbursements

By Jason Watson, CPA
Posted Sunday, October 10, 2021

We would prefer that employee reimbursements through an Accountable Plan be done as a single check or transfer from the business checking account into your personal checking account (as the employee). This makes the accounting very straightforward- you debit Employee Reimbursements and credit Cash. If you are using QuickBooks, you categorize the check or transfer as Employee Reimbursements with splits for each sub account (home office, mileage, cell phone, internet, etc.).

This is the most elegant.

Otherwise, the processing of an Accountable Plan can be done at the end of each quarter to basically reclassify owner or shareholder distributions as employee reimbursements. For example, let’s say you took out $20,000 over the quarter as distributions. But after completing the Accountable Plan Reimbursement, the business owed you $5,000. We would make an entry to reflect the reimbursement, and your shareholder distributions would be re-classified as a $15,000 distribution (taxable) and a $5,000 reimbursement (non-taxable).

Here is a sample journal entry for an S Corp shareholder who took out $20,000 as a shareholder distribution, but later re-categorized the transaction as distributions, wages and employee reimbursements.

When the original distribution took place, there was a debit to Shareholder Distributions for $20,000 and a credit to Cash for the same. We are simply reducing the $20,000 by $8,950 so the actual distribution reflects $20,000 less $8,950 or $11,050. No adjustment is made to Cash. Make sense?

If we were putting this transaction into the books together from the start, it would look this starting with the shareholder distribution-

And then the Owner Wage Expense and Employee Reimbursements-

Everything would end up in the same spot- Shareholder Distributions at $11,050, Owner Wage Expense at $7,000 and Employee Reimbursements at $1,950. Cash spent would be $20,000. The only difference is the first example is a correcting or reversing entry.

This is a slight over-simplification since there would also be a Payroll Tax Expense entry for the business’s portion of Social Security, Medicare, Unemployment, etc. but this should be illustrative enough.

The “look back” at the end of the quarter might not work if you provide a stipend or some other advance to your employees throughout the period. This is due to the time limits imposed on the substantiation requests and returns of excess reimbursements. Try to avoid the advance or stipend approach.

While the single check or bank transfer is ideal and elegant as we mentioned earlier, Accountable Plan reimbursements are commonly done at tax return preparation. Just like the example above, we reclassify some shareholder distributions as employee expense reimbursements.

The downside to this approach, and why the quarterly method is preferred, is that it throws off tax planning. If we are bouncing along thinking you are going to earn $100,000 but in reality it is $80,000 after Accountable Plan expenses are reimbursed, this could easily swing your tax obligations by $4,000 to $5,000. Sure, it would be in your favor as a tax refund, but it is still not ideal tax planning.