When it comes to S-Corps, business owners are not allowed to pay their mixed expenses directly out of their S-Corp business accounts. For the IRS, mixed expenses are costs that have both personal and business uses; for example, the business use of home and mileage deductions for cars that are used for both business and personal purposes.

If you pay mixed expenses from your S-Corp account, the IRS might reclassify payments as shareholder distributions. Excessive distributions are problematic, especially if they exceed shareholder wages, as this could trigger a reasonable compensation audit.

An S-Corp is its own separate entity from its owners, so it needs to be treated that way.

Here's a simple process for handling reimbursements in a one-person S-Corp:

1. Create an Accountable Plan: This plan should list which expenses can be reimbursed and how payments are made. Ideally, reimbursements should be done monthly or at least quarterly.
2. Calculate the Business Use Percentage: Determine what part of your expense is used for business. For example, for the business use of home, divide the size of your home office by the total size of your home. Keep a floor plan and photos of your office in case of an IRS audit. For the mileage deduction, figure out your personal and business miles driven during that period. Keep a driving log as a proof.
3. Apply This Percentage to Your Mixed Expenses: For the business use of home deduction, you can reimburse a portion of expenses such as rent, mortgage interest, real estate taxes, utilities, and homeowner's insurance. You can read more on business use of home deduction here. For mileage deductions, you can reimburse either actual expenses or standard miles. You can read more about mileage deductions here. To make tracking easier, consider using the same credit card for all mixed expenses.
4. Calculate Depreciation: If you own your home, you can also reimburse for depreciation. Reimbursement for depreciation also works with vehicles, but it makes sense to write off depreciation (go the actual expense route described above) only when the car is expensive (and/or heavy). In simple words, depreciation is a non-cash expense that lets you write off the cost of expensive assets and get an immediate tax deduction. But remember, you’ll need to pay taxes on the depreciated part of the asset when you sell it. This tax concept is called "depreciation recapture."
5. Submit Your Reimbursement Request: Fill out the template with your expenses and submit it to your S-Corp (which is also you). Keep all receipts or credit card statements as proof.
6. Reimburse Yourself: Transfer the reimbursement amount from your S-Corp account to your personal account or write yourself a check.
7. Record the Reimbursement: In your S-Corp’s accounting records, log this reimbursement as a business expense under "reimbursements."

At our firm, we know that managing accountable reimbursement plans can be a hassle. We simplify it for our clients: just send us your total mixed expenses for the quarter, and we’ll handle the paperwork, calculate the deductions, tell you how much to withdraw, and record the transactions in the books. Our clients only need to provide the expenses and transfer the money.