Employees who travel a lot for business – executives and owners – are juicy targets for an auditor. The IRS is cracking down on expense reports and determining that some reimbursements you receive may be taxable.
Some of the more common problems
- “Taxi” or “Airfare” is not an adequate explanation. A valid and compelling REASON that every line item expense was necessary must be clearly stated.
- We accounting people should actually know what you talked about at dinner or on the golf course…so make something up that’s fun to read. Entertainment has to be more explicitly documented than any other item. Name the person you entertained, their title, and the biz purpose.
- A credit card statement is not a receipt!! but an electronic copy of the vendor’s receipt is fine.
Timing is everything – and there are some tiny loopholes too
- 60 days is the window the IRS considers “reasonable” for submitting your expense report and substantiating expenses.
- If you get an advance, and you fail to substantiate it within a reasonable amount of time, that has to be re-characterized as taxable income. So if you’re the kind of person who must have cash in hand before you head out for a business trip, you might want to ask for a “per diem”. We can calculate that amount for you (by city), pay you, and you’re done.
- If the expense was less than $75, and an accurate, detailed reason for the expense is provided, a receipt is not necessary. (Your employer may still want the receipt though!)
If your company is audited, and the IRS finds gaps in the file, the result is tax+interest+penalties for everyone involved:
- The person reimbursed will be taxed on the reimbursement.
- The company’s tax deduction is disallowed, and the employer also owes more tax.
Everyone loses except the government. Help us help you. If we kick back an expense, don’t shoot the messenger!
The following blog post was submitted by Team Jenn Corp., a full service, virtual, outsourced, finance and accounting company. You can follow them on Facebook.